"Investing in Stocks -- 05 (Rule of 72)"
The sole purpose of any investment is to grow your investment year on year. The rule of 72 is a simple way to determine (a rough estimate) how long an investment will take to double given a fixed annual rate of interest \ annual rate of return (investment in stocks).
In the good old days, when my parents use to invest in National Saving Certificate (NSC), the amount use to double every six years. for e.g:- if we invested 50 rupees after 6 years we use to get 100 rupees.
Rule of 72 is pretty accurate for lower rate of returns, but even at a larger rate of return it is pretty close (gives you a pretty close rough estimate). The Rule of 72 can estimate compounding periods using natural logarithms.
As seen in example above if we invest 2 rupees in year 1, it doubles to 4 rupees by end of year 6. To adjust the factor more for accuracy 69.3 serves as a accurate factor, but since 72 is more convenient for mathematical calculation and is pretty close we prefer to use it.(but if more accuracy is needed go for 69.3)
Similarly if you have a target figure (in years) in which you need to double your investment, the rate of return can be calculated from formula above.
example:- if you need to double your investment in 5 years and want to calculate the annual rate of return needed to achieve it, it can be found as shown below
72/5 = 14.4 % every year to double your investment in 5 years.
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