Understanding the Rule of 72
How It Applies to Your Investment Strategy
When it comes to investing, time and compounding interest are two of your most powerful allies. But how do you quickly gauge the growth potential of your investments? Enter the Rule of 72. This simple formula helps investors estimate how long it will take for their money to double, based on a fixed annual rate of return.
In this article , we’ll break down what the Rule of 72 is, how it works, and how it can apply to your investments—whether you’re in a traditional fund like the S&P 500 or exploring high-yield opportunities like the ones offered by our fund.
What is the Rule of 72?
The Rule of 72 is an easy-to-use formula that estimates the number of years it will take for an investment to double in value, given a fixed rate of return. Here’s the formula:
72 ÷ Annual Rate of Return = Number of Years to Double Your Investment
The rule works best for returns that range between 6% and 12%, making it especially handy for long-term investors seeking consistent growth (Investopedia).
How Does It Work? A Simple Math Example
Let’s say you invest in an asset with an 8% annual return. Using the Rule of 72, you would divide 72 by 8:
72 ÷ 8 = 9 years
So, it would take approximately 9 years for your investment to double. The beauty of this formula is its simplicity—it gives you a rough idea of how quickly your money will grow without needing a financial calculator or spreadsheet (The Balance).
Hypothetical Example 1: Investor A in the S&P 500
Now, let’s put this into perspective. Suppose Investor A puts $100,000 into the S&P 500, which historically has returned about 8% annually over the long term (Macrotrends). Using the Rule of 72, we can calculate how long it would take for this investment to double.
72 ÷ 8% = 9 years
After 9 years, Investor A’s $100,000 will grow to $200,000. Assuming the return continues at 8%, it will double again after another 9 years, reaching $400,000 by year 18.
While a consistent 8% return is a solid strategy for long-term growth, it can take nearly two decades for significant gains to materialize (Investopedia).
Hypothetical Example 2: Investor B in a High-Yield Fund
Now let’s look at Investor B, who invests the same $100,000 in a high-yield fund like REI Transactional, which offers a fixed 15% annual return (REI Transactional). Using the Rule of 72, we’ll calculate how long it takes for this investment to double.
72 ÷ 15% = 4.8 years
In less than 5 years, Investor B’s $100,000 will double to $200,000. At the same 15% return, the investment will double again after another 4.8 years, and once more in the following 4.8 years. After 20 years, Investor B’s investment will have doubled four times, growing to a staggering $1.6 million.
Comparing the Two Strategies
While the S&P 500 is a trusted vehicle for long-term growth (Macrotrends), our high-yield fund offers significantly faster compounding. Investor A’s portfolio grows at a steady pace but takes longer to see large returns. Meanwhile, Investor B benefits from the higher rate of return, doubling their investment more frequently and reaching over seven times the initial amount in 20 years.
Why This Matters to You
The Rule of 72 is a powerful tool for investors, allowing you to quickly assess how long it will take to see meaningful growth in your portfolio. It’s not just about the percentage returns; it’s about understanding the time value of your money and how different investment strategies can impact your long-term financial goals.
At REI Transactional, we offer investors the opportunity to achieve a higher rate of return through real estate-backed investments. With a projected 20.8% annualized return and quarterly distributions (REI Transactional), you can see the benefits of compounding at an accelerated pace—much faster than traditional investment vehicles.
If you’re ready to put the Rule of 72 to work and explore higher growth potential, contact us today to learn more about our fund and how we can help you achieve your financial goals faster.
