Rule of 72: How long does it take to double your money?

• Level: For advanced
• Reading duration: 4 minutes

What is the Rule of 72?

The Rule of 72 is a quick and dirty formula that helps us to grasp the long-term potential of different investments. It’s also a great way of measuring the impact of insidious wealth threats like high fees and inflation. Here’s how to use the Rule of 72 to understand the growth potential of your investments: For example:

• The average historical return on the MSCI World EUR is around 7.5 % annualised
• 72 / 7.5 = 9.5 years to double your money (if your MSCI World ETF’s performance matches the average historical return)
• Your money will double again if the MSCI World achieves the same in the following decade

That’s pretty reassuring.

That's exactly why you need shares in your portfolio!

Now we can use the Rule of 72 to quickly visualise why we need to pack our portfolios with equities to achieve our long-term financial goals. This time we’ll use inflation-adjusted numbers:

How long each asset class takes to double your money

Wow! Now we can see why cash in the bank is not enough to achieve a big, stretch objective like retirement. We would all die of old age long before cash savings ever helped us over the line. So the Rule of 72 shows us that lower risk assets are only useful in a defensive role. They are unlikely to grow your pension pot quickly enough - while maintaining purchasing power - to support a comfortable retirement. A better strategy is to drip-feed your cash into a buy and hold portfolio over the long-term.

The Rule of 72 versus inflation

You can use the Rule of 72 to assess how quickly a negatively compounding force like inflation takes to halve your money.

• For example, a moderate inflation rate of 2% per year halves your money in: 72 / 2 = 36 years
• But a high inflation rate of 10% would halve your money in: 72 / 10 = 7.2 years

As you can see, high inflation is absolutely devastating if your assets don’t maintain their purchasing power. Even moderate inflation of 2% significantly corrodes wealth over the course of a long retirement, which is another reason not to stay hunkered down in cash.

The Rule of 72 versus fees

Imagine two equivalent investments but one charges 2% fees (e.g. hedge fund level) and another 0.2% (e.g. low cost ETF level):

• 2 % fees per year: 72 / 2 = 36 years
• 0.2 % fees per year:72 / 0.2 = 360 years

That’s how long each investment would take to halve your principal if they did not turn a profit. Now of course, we’re relying on our investments to offset their fee through performance. However, we already know that active fund managers do not beat the market on average. So the Rule of 72 shows just how wounding how high costs can be when they’re not concealed by the market return. Though the percentage differential in charges does not look huge at first glance, it’s actually capable of transferring a huge amount of wealth from your wallet to a high-fee manager’s.

Inflation versus your mortgage

Here’s one last example that shows how long it would take inflation to halve the real cost of your mortgage:

• 72 / 2 = 36 years
• 72 / 6 = 12 years

How to read this? So moderate inflation at 2% would cut the inflation-adjusted burden of your mortgage by 50% in 36 years. However, above average inflation could halve it in twelve. This is a good reason to invest versus overpaying your mortgage as inflation will whittle down your mortgage over the years while equities have historically beaten inflation. That’s it for the Rule of 72. It’s a great visualisation aid that enables you to quickly evaluate the long-term impact of differential returns, fees, and inflation.