The Rule of 72 And How It Affects Your Portfolio’s Value

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Many times when it comes to investing, people are so harped on to the performance in % terms of how a particular stock or fund is doing, without considering the underlying risk to attain the % return and likewise, how many are “brainwashed” into thinking that 7% returns over the long run is enough to cover you through retirement or to reach your financial goals.

Just how much return is required and what is considered a good rate of return?

Enter the rule of 72.

For those who have never heard of it, the rule of 72 is basically an easy way to determine how long a particular investment will take to double your initial capital. How do we make use of this rule?

We simple take 72 divided by your annual rate of return and the answer will be how long it will take for your investment to double in value.

Let’s take an example: Assuming you are able to remain invested on a fund that generates you 10% return, by taking the rule of 72, if you put in 10K in this fund, you will be able to double it into 20K in 7.2 years. (72/10)

Of course, its not exact science but this simple rule gives you an estimate to whether a particular investment is good enough for you and whether it fits into your time horizon. Below is a chart that will help visualise the difference between rate of return and the time taken to double your capital:

Rate of Return -- (Years to Double)

0.05% (Bank interest rates) -- 1440 years

2% (Money Market Returns) -- 36 years

4% (CPF SA Returns) --18 years

7% (Average Stock Market Returns) -- 10.3 years

10% -- 7.2 years

15% -- 4.8 years

20% -- 3.6 years

30% -- 2.4 years

50% -- 1.44 years

The chart above ignores variables such as asset inflation, cost of goods and more, but is just a simple way to get the idea visualised.

If you simply put your money in a bank, its impossible to double your money in your lifetime. If we bring in inflation, your money is basically compounding backwards since consumer price inflation is approximately 2%-2.2%.

This is why the higher your returns, the faster it will take for the compounded returns to double or triple or quadruple depending on your rate of returns.

Over the long run, it may be near impossible to attain returns of 30% or more annualised since even the best investors in the world like Warren Buffett and Peter Lynch are averaging around 20%+ returns on an annualised basis.

Look for opportunities

The market is an interesting place. In one camp we have close-minded individuals that refuses to take risk and prefer to have their money eaten away by inflation even though they are folks with decades worth to compound their capital.

On the other camp we have opportunistic individuals that seek out the highest returns by dabbling in US tech stocks or crypto or even derivates trading but at the end of the day it all comes down to risk appetite.

How do you truly determine your risk appetite? You have to ask that yourself as every individual’s situation are different and hence the level of risk we can take varies.

If you have no liabilities (no debts, no loans, cleared all liabilities and won’t face any huge financial woes), then you should be able to take on more risk which offers higher return if you do your due diligence properly.

Understanding “Risk”

Nothing comes risk-free in the world. Even putting your money in the bank is risky because you risk the bank becoming insolvent and you are risking your future when inflation is clearly eating away at your wealth.

Even holding cash and putting it in tin cans are risky since insects or robbers might destroy your wealth in an instant.

Instead of believing that investing is risky, understand how you can manage risk and balance your risk-reward ratio. If a particular investment offers unlimited upside returns in exchange of 20% downside risk, that is an extremely great trade off!

If you put in $100 and the maximum it can drop is to $80 (20% drawdown), but the upside is unlimited meaning your $100 can even grow to become $1000 or more, then its a worthy investment.

This post is more for the beginners and newer members on their investing journey, and understanding the rule of 72 is one of the foundations to determine whether an investment is suitable or not for the long run.

Asset Classes

As many people know, there are multiple asset classes that investors can invest in an each serves different purposes for different investors.

Ultimately, asset allocation is what drives return so this should not be taken lightly. I mention this in my previous post in my portfolio update and I will reiterate it here:

If you hold a bunch of bonds, don’t expect to make more than 4% returns, if you hold a bunch of stocks and bonds, don’t expect to make more than 10% returns, and if you hold a bunch of cash, don’t expect to make any returns if you just put it in the bank.

The reason to this is simple. Your returns is proportionate to the amount of risk you are willing to take.

If you are only comfortable with zero price fluctuations but wants 20% return, that is impossible unless you are talking about holding Stablecoins in interest bearing application on DeFi. (This also comes with other risk such as currency peg risk and smart contract risk)

If you are only willing to tolerate a 10% paper loss, then don’t expect market beating returns like 50% returns a year or even 100% a year. Your risk and return are closely linked which is why the phrase “High risk high reward” or “Low risk low reward” came about.

While I illustrated in the table above that attaining higher returns will allow you to double your money in the shortest amount of time, please be aware of the risk that comes along with higher returns as well.

So, what to do?

As for myself, since I have a huge runway ahead of me (I’m 22), I have higher risk appetite, which is why I am concentrating the majority of my stocks into US growth stocks and the rest into crypto to generate the highest alpha** **for me over the long run.

Personally, I think there is no need for bonds in a Singaporean portfolio since we have our CPF portfolio which are compulsory and they do generate decent returns of 2.5%-4% but at the expense of liquidity. However, some individuals still prefer to have a small portion allocated to bonds to sleep better at night and that is okay as well. But just remember: Asset allocation drives returns.

As for the majority who are clueless about the stock market, you can either invest through Robo advisors such as Syfe or you can simply open an US brokerage like Firstrade which I use myself and buy ETFs and call it a day.

For those who are already investing in the stock market and wish to dive into the crypto world, you can check out my review of a highly regulated and top notch exchange I use to buy Bitcoin and Ethereum:** [Gemini Exchange **](https://investingbeanstalk.wordpress.com/2021/01/06/buying-bitcoin-check-out-gemini-exchange/)

For those who want to generate higher yield on their crypto holdings safely and securely, you can check out this article here as well.

For those who are already into Crypto

Want to learn how you can earn high yielding interest rates on your idle crypto assets in a secure, safe and easy manner? You can read up more on my post here or do your due diligence on Bitcoin here and also my crypto exchange of choice Gemini here if you are looking to buy your first crypto!

The Power of Low Fees

One huge advantage I have as an investor is paying very minute fees which can really eat into returns in the long run because I am using Firstrade to buy US Stocks which has absolutely $0 fees and extremely fast wire transfers for deposits and lightning fast trade executions.

Ever since I switch to Firstrade last year as my main investment vehicle, I saved up on a ton of fees and hence able to achieve way better returns than before. I saved up more than 5 times the fee paid in 2018, 2019 and 2020 this year due to the switch and I am really happy thus far.

Of my entire investments in 2020, fees only take up 0.1% of my entire portfolio! (2018+2019+2020 combined across all brokers and Robo)

Alright that’s it! For now, think long term, tune out the noise and avoid the temptation of gambling meme stocks, think of the companies that will do well in the long run simply find bargains/dollar cost into your positions. If you need some inspiration for companies to research, you can check out my post on 5 stocks to buy if the market crashes here.

I use StocksCafe to keep track of all my investments + research on stocks and track my portfolio performance against various indexes as shown above. You can also view my portfolio as well as many others so you can compare your own performance with other investors. If you are interested in signing up, you can use my referral link to sign up and access premium features for 1 extra month for new users. (3 months)

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Disclaimer:

The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. In fact, the content is not directed to any investor or potential investor and may not be used to evaluate or make any investment.

Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stock broker or financial advisor. (Or contact me!)