Rule of 72

HOW LONG WILL IT take to double your money, given a particular rate of return? You can get a rough answer by dividing 72 by the annual return. For instance, if you expect to earn 7% a year, it would take just over 10 years to double your money. But at a 3% annual return, the compounding process is much slower, with your money doubling every 24 years.

Obviously, the higher the return you earn, the easier it will be to achieve your financial goals. But keep three caveats in mind. First, don’t make the mistake of assuming a high return to make your financial plan work. If anything, you should assume low returns and hope to be pleasantly surprised.

Second, historical returns are a dubious guide to the future, especially given today’s rich stock market valuations and modest bond yields. Finally, you have to take high risk to earn high returns—which means the ride could be rough and the risk may not be rewarded.

Next: Losses Hurt More

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Article: Math Rules