Rule of 72 - the doubling effect
'Rules of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to double.
For example, the rule of 72 states that $1 invested at 10% will take 7.2 years (72/10=7.2) to grow to $2.
$100K@3% > $200K
Bonds/Unit trusts @3-5% p.a. > 24 years
$100K@6% > $200K > $400K
Index funds/ETFs/Blue chips @ 6-7% p.a. > 12 years > 24 years
$100K@12% > $200K > $400K > $800K > $1,600K
A basket of value stocks@ 10-12% p.a. > 6 years > 12 years > 18 years > 24 years
By the way, Fixed Deposits will take 72 years to double at 1% interest.
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Hard facts
Every $200,000 will grow to $800,000 in 12 years' time at 12% compounded yearly.
$800,000 will give you $40,000 yearly retirement income @5% withdrawal rate.
That will be $3,333 a month of lifetime income.
You will not outlive your money and you can still leave an estate for your loved ones.
Key Questions
At what rate is your portfolio currently growing?
Is 10% per annum achievable?
Find the answers at
www.aggregate.com.sg
Studies done by Teh Hooi Ling show that buying a basket of value stocks, based on metrics like dividend yield, price-earnings and price-to-book ratios, can deliver returns upwards of 10% p.a.
Teh Hooi Ling, CFA
Head of Research, Executive Director
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