Over the years whether I am chatting with friends about investments or meeting a potential new client, I always ask: “how well have your investments performed?” You may or may not be surprised that the resounding answer is often: “I have no idea.”
I believe it is important to be aware of how your investments are performing to ensure you are able to plan for your future and budget to make certain you are meeting your objectives and risk tolerance.
The Rule of 72 is a general rule of thumb that will help you understand the amount of time it will take for your investments to double with your current rate of return or it can help you determine what rate of return you will need in order to double your investments within a desired amount of time.
This rule will ultimately allow you to visualize how your investments have performed and it stresses the importance of compounding and the effects of the rate of return you are achieving.
Below I will walk you through a few examples of how to use the Rule of 72.
72 ÷ Rate of Return = # of Years to Double Investment
You can calculate the number of years it will take for your investments to double by dividing 72 by your rate of return or your assumed growth rate.
For example, if you have a rate of return of 6%, you would divide 72 by 6 not 6% which equals 12 years. This result means your investments will double in 12 years if you consistently achieve a rate of return of 6%.
72 ÷ 6 = 12 Years
Another way to look at it is by determining the number of years you would like to double your current funds by to then calculate the rate of return required to reach that goal.
72 ÷ # of Years to Double Investment = Rate of Return
For example, if you would like to double your current funds in 18 years, you will divide 72 by 18 years which equals a rate of return of 4%.
72 ÷ 18 Years = 4 or 4%
You can use the chart below to understand the effects of how increasing or decreasing your rate of return can impact the amount of time it takes to double your investments. By increasing your rate of return from 4 to 6 percent, you can reduce the amount of time it takes to double your investments by 6 years. It is also important to recognize that the sooner you start investing, the greater the compounding of your net worth will be.
The way your money is invested has a direct impact on the rate of return and the growing cash flow you will achieve.
With the Quarterly Portfolio Reports you presently receive, we provide you with year to date as well since inception which is the cumulative rate of return to keep you fully informed on your progress. This report also lets you monitor how your income is growing or declining quarter by quarter. The Quarterly Portfolio Reports also compares your rate of return of your portfolio to the S&P/TSX index, FTSE TMX Mid Term Bond, and to a 3 month Canada T-Bill. I hope this comparison will help you visualize the performance of your investments to other asset classes. Our goal is to maintain a rate of return that will help to prepare you for your future and replace you current income in retirement.
Please feel free to reach out to us if you would like to discuss this further.
“How will you replace your current income in retirement?” – Jim Seyers