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The Rule of 72

72When comparing the rate of return on investments, it is helpful to have a consistent standard.  By far the most common standard is to simply compare the annualized rate of return.  If investment A return 3% and investment B returns 5%, the risk of the two choices being equal, the obvious choice is investment B.

That is good as far as it goes, but what does it really mean in terms of long-term growth?  In other words, how meaningful is that 2% difference?

The Rule of 72 allows you to measure investment returns in term of time instead of percentage points.  If you use doubling time (how long will it take for money to double) as a standard of measure, you can see how long your investments will take to bear fruit.

 

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