In our experience there are two primary reasons people don’t invest:
They’re intimidated by all the foreign lingo.
They’re more focused on the short-term than the long-term.
Today we want to share a secret to getting over both of these hurdles.
We believe that by focusing on the appreciation (i.e.returns) you can expect to receive, it makes it easier to invest in the first place.
But how much can I expect to earn, you ask?
Let’s take the question “How long will it take to double my money?” Hardly anyone would claim doubling your money is a poor investment (but the time frame matters as well).
Doubling your money means you are wanting a 100% return. You invest $1,000 today and you want $2,000 some time in the future.
($2,000 - 1,000 = 1,000) / $1,000 = 1 (or 100%)
8% per year is a widely-used conservative estimate for long-term market returns. So let’s take our 100% we are aiming for and divide it by 8.
This comes out to 12.5.
“You mean it will take 12.5 years for me to double my money? That hardly seems worth it” you say as you throw your hands up and leave the room.
Before you throw in the towel, let's double check the math...
Well that’s interesting. Our example investment earned more than double in the 12.5 years we estimated. Why is this? Because the money you earned along the way also earned money for you (financial wizardry, if ya ask me!). This is shown in the Interest/Appreciation column above. It’s referred to as compound interest and it’s going to be your new BFF.
But I still want to know how long it will take to double...
There’s a shortcut that helps estimate this, which is called the Rule of 72.
The Rule of 72 says that if you divide 72 by the annual percentage yield of an investment (8% in our example above), the result is how long it will take for the investment amount to double.
72 / Annual Percentage Yield = Number of Years for Investment to Double
At an 8% annual percentage yield, the Rule of 72 tells us it should take approximately 9 years for your investment to double in value. The value of compound interest helped us get there 3 and a half years sooner!
We should point out that the math is only as good as the assumptions on which it depends.
If your assumed annual yield turns out to be something much less 8%, it will take longer than the estimated 9 years to double your money.
The stock market in particular is very volatile. Sometime it’s down, sometimes it’s up. That’s just reality. But over the long-term, we can safely make certain assumptions about the average yield.
By focusing on simple mental shortcuts such as the Rule of 72, you can tell yourself “I’m going to double my money” when you need that extra boost of confidence to make an investment. Hey - it’s certainly better than cash stuffed under the mattress earning nothing!
Investing shouldn’t be intimidating and you can use the Rule of 72 to ‘trick’ yourself into making smarter financial moves. Trust us...your future self will thank you.
Cheers!
Eddie & Megan
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