The 7-Year Rule For Investing
Updated on: December 2022
Written by: Kelly Koeppel
How you should invest your money depends on what your goals are for your portfolio. While this advice might seem obvious (even cliche), it’s worth repeating—if only because so many investors consistently ignore it.
Here’s an example. Let’s say you want to build up a nest egg that you can live comfortably on once you retire. Maybe you want your portfolio to reach $1.5–$2 million by the time you’re 65.
Now, you might be thinking, ‘That’s all well and good, but how do I reach that goal? How much do I have to invest, and over how many years? And where do I put all my money?’
The more you ask yourself these questions, the more complicated it all becomes. You realize rather quickly that there are enough variables involved to make your head spin.
Thankfully, there’s also a formula that can help set it straight again: the Rule of 72.
What is the Rule of 72?
Before we explain what this rule is and why it’s good to know, it’s worth mentioning that there’s a fairly turnkey way to get answers to your long-term investment questions.
If you know how much you have saved up right now, and want to figure out how long it would take for your money to grow to a certain amount at a specific annual growth rate, you can always sit down with a compound interest calculator and figure it out in a few minutes.
That being said, compound interest calculators can be confusing without some expert guidance. And while they will give you an answer, you might not understand why you’re getting that answer, or what assumptions the calculator’s algorithms are using behind the scenes.
So, if you want to do things yourself, use the quick and easy Rule of 72 instead. It’s literally just a two-step process:
Step 1. Figure out your estimated annual percentage return
This figure depends on the type of investments you’re considering. For example, the stock market has a well-established, long-term annual return, while bonds have fixed rates that fluctuate only slightly over time.
The long-term average annual return of the U.S. stock market as a whole is around 10%. The annual growth of the S&P 500 index, in particular, is 11.88% (measured from 1957–2021). But we’ll use 10% because it’s an easier number to work with and we want to be conservative with our estimates.
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Step 2. Divide 72 by your average expected annual return
Just drop the ‘%’ symbol and go from there. As an example, if you’re assuming a 10% annual growth rate, the Rule of 72 formula will give you ‘7.2’ as an output:
72 / 10 = 7.2
Here’s why this formula is so useful. The answer you get is how many years it should take for your money to double.
In this case, it would take you 7.2 years to double your money. If instead your average expected annual return was a more modest 7% (accounting for the typical annual inflation of around 3%), dividing 72 by 7 would result in 10.3, meaning it would take slightly over a decade for your money to double under those conditions.
Once you have the number of years it takes to double your portfolio, it will much easier to ballpark how long it will take for you to meet the financial goals you’ve set for your portfolio under various scenarios.
Let’s say your initial investment is $100,000—meaning that’s how much money you are able to invest right now—and your goal is to grow your portfolio to $1 million.
Assuming long-term market returns stay more or less the same, the Rule of 72 tells us that you should be able to double your money every 7.2 years. So, after 7.2 years have passed, you’ll have $200,000; after 14.4 years, $400,000; after 21.6 years, $800,000; and after 28.8 years, $1.6 million. So it should take you between 23–25 years to reach your goal of $1 million.
It’s important to remember that the Rule of 72 only tells you how long it will take you to double your money if you leave that money untouched. If you’re making consistent and repeated contributions to these savings, it will take less time for you to reach your goal, and you can find an exact answer by using a compound interest calculator instead.
Fun fact: You might be wondering, ‘Why 72?’ The answer has to do with some pretty gnarly algebra we won’t be covering in this article. But anyone interested can learn more here.
Applying the Rule of 72 to the real world
It’s perfectly fine to use 10% as our expected average annual return if you’re looking for a quick answer and your portfolio tracks the S&P 500 or the overall markets. But you’ll get a more realistic answer by taking average annual inflation into account.
From 1960–2021, average annual inflation was 3.8%. Let’s round that up to 4% to be conservative—especially considering 2022’s unusually high inflation, which is forecast to peak at 8.8% by year’s end. Rounding up gives us a safety net that can account for unpredictable years like this one.
Now, if we subtract our 4% average inflation from a 10% average S&P 500 growth, we get 6%. Next, we can plug in this more realistic expected annual return into our Rule of 72 equation:
72 / 6 = 12
There you have it. While doubling your money every 12 years instead of every 7.2 years is certainly a big difference, that’s still a very good problem to have!
But the difference gets bigger the further out you go. If you need to grow your portfolio 800%, for example, then you’ll reach your goal with a 7.2-year doubling rate after 21.6 years—but it will take you 36 years at a 12-year doubling rate.
Either way, you don’t want to base a decades-long retirement plan on a simple calculation that could be 15 years off. That’s why it pays to be honest with yourself about what your long-term goals are and what investment strategies you can realistically stick with to achieve them.
Does your portfolio track the market?
Stockpickers beware: the Rule of 72 assumes your portfolio has a similar makeup to the S&P 500, an index of 500 of the largest companies in the U.S. across industries. If your portfolio doesn’t look at all like the S&P 500, then the Rule of 72 probably won’t be a useful tool for you.
A portfolio with a similar makeup to the S&P 500 and the overall markets will be well-diversified with index and mutual funds across sectors. It also won’t be too heavily weighted towards specific, individual stocks. If your portfolio is mostly Fortune 500 tech stocks, for example, a closer and more useful comparison would be the NASDAQ instead of the S&P 500.
The good news is that it’s fairly easy to track the markets and maintain a diversified portfolio going into retirement. Just take Warren Buffett’s decades-old advice and invest in low-cost index and mutual funds. This is the easiest and most affordable way to grow your nest egg alongside the markets while still sleeping soundly at night.
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