The Rule of 72

Hello,

Before the scientific calculator, there were many calculations made with simple division and multiplication. One of these calculations is used to find out how long before a sum of money would double in value with a specific rate of return. This is the "Rule of 72".

The rule number "72" is divided by the interest percentage per period (usually years) to obtain the approximate number of periods required for doubling of the amount in question. For example, if you were to invest $1000 with compounding interest rate at 9% per annum, the rule of 72 is 72/9 = 8 years for this investment to be worth $2000.

Another rule of thumb known as "Own Your Age in Bonds" has been floating around for 30 years or so. It basically states that your portfolio should contain your age in bonds. If you are 80 years old, then this rule states that your portfolio should hold approximately 80% in bonds. Though the thinking seems somewhat solid as it implies that as you near retirement age your portfolio should be more income oriented, it does however eliminate an actual investment objective. Many investors choose to use alternative ratios of stocks to bonds rather this quasi simplified rule.

Success in all your efforts,

John

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John R. Kinkead

Vice President of Wealth Advisement