Rule of 70: How It Works and What To Know
When you invest in something, you want to know how long it is going to take for it to double in size. While this is not something that can be predicted 100 percent since the markets can change between the time you make an investment and the time it actually takes for the investment to double, there are some tools you can use that will help you get a better idea of how long it might take. One of these is the rule of 70. Here, we will break down everything you need to know about the rule of 70.
What is the Rule of 70?
The rule of 70 is a formula that you can use to determine how long it will take for your investment to double. It is also called the doubling time since that is what it determines. To use the rule of 70, you will need to know the rate of return you anticipate from the investment, and it will provide you with a good estimate of how long it will take for the investment to double. If you are debating between investing in two different things, the rule of 70 can also help you compare the two of them to determine which one will double faster.
You can use the rule of 70 on most investments, though it is most often used when comparing the growth rates of different portfolios or mutual funds. The rule of 70 is popular because it is a simple formula to look at the long-term growth of an investment. It is most commonly used on retirement portfolios.
How to Calculate the Rule of 70
To calculate the rule of 70, you first need to know the annual rate of growth for your investment. Then you divide that number by 70, which is why it is called the rule of 70.
Doubling Time = 70 / Annual Growth Rate
For example, if an investment has a five percent growth rate, it will take you 14 years for your investment to double:
70 / 5 = 14 years
The results will show you the number of years that it may take your investment to double.
What Does This Tell an Investor?
While the rule of 70 is an estimate of how long it will take for the investment to double, it is a more concrete way to look at the potential a prospective investment has, whether it is a mutual fund, retirement portfolio, or another type of investment. By knowing the time it will take to double, you can decide which investment is more worthwhile. This is important when looking at your retirement portfolio because it can tell you how long it may take for your investment to reach your desired value.
If you are trying to choose between a few investments and you want to know which ones will have a better rate before you retire, the rule of 70 is the perfect way to help you get a better idea of which ones to invest in. It is a simple, straightforward formula that is easy to calculate and understand.
Limitations for the Rule of 70
The big limitation to the rule of 70 is that it is only an estimate of how long it may take for an investment to double. It also assumes that the current anticipated growth rate of the investment is going to be the same for the entire lifetime of the investment, which is not always the case. The stock market can be volatile, so something with a five percent growth rate today could potentially go up to eight percent or drop to three percent tomorrow.
Considerations for Rules 69 and 72
The rules of 69 and 72 are also used in a similar manner to the rule of 70. The formulas for them are nearly identical, but they use a different number and get slightly different results. All three of them have different situations in which they are the more accurate calculation.
When calculating the double time for something with a lower interest rate and continuously compounding intervals, the rule of 69 is more accurate. The rule of 70 is more accurate when looking at an investment with semi-compounding intervals. The rule of 72 is more accurate for an investment that is annual compounding.
Rule of 70 vs. Real Growth
When it comes to the rule of 70, it is crucial that any investor using it keeps in mind that it is an estimate, not anything concrete. If the growth rate of the investment changes, it will completely change the initial rule of 70 calculations that were done before you decided to invest.
The rule of 70 also has some other applications beyond investments. You can use it to determine how long it may take for a country's economic growth, or gross domestic product, to double. It can also be used to determine the rate of population growth in a country.
For example, in 1953, the population in the United States was 161 million, and the growth rate was 1.66 percent. By using the rule of 70, the population of the US should have doubled in 1995. However, changes were made to the growth rate in that time, so the initial application of the rule of 70 was not accurate.
Summary
The rule of 70 is a simple, straightforward way to determine the rough estimate of how long it will take for an investment to double. These can be used to get a good estimate of what investments might be better or worse to invest in when debating between multiple investments. These rates can change, but it is a good way to forecast the growth of a prospective investment before you decide to put your money into it. The rule of 70 is a good way for an investor to strategize and find the best investments for their money, at least based on the current market projections.