Have you ever heard of this?
If not, this could be one of the most enlightening posts you will ever come across in our investing career. This is one of the most basic functions of investing and wealth building. Understanding this simple mathematical formula will lead to massive opportunities.
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The key to massive wealth building is compounding. This is the basic formula of time along with a rate of return. The greater the return, the less time required to meet certain objectives. Or, to put another way, the greater the return, the more money that will be available over the same time frame.
One of the primary objectives is to keep doubling an account. This is something that should be done a number of times if possible. It is where the numbers can really get silly.
So, how long will it take you to double your investment? This is something astute investors know off the top of their head. It is also something you should seek out in all you are doing.
Here is where the Rule of 72 makes life simple.
As the above formula shows, to figure out how to do this, simply divide 72 by the rate or return.
Hence, if your investment is earning 6%, then it will take you 12 years to double your money. By the same token, a 12% return (like what HBD in savings pays) means a doubling in just 6 years.
While this might seem like a long time, consider this: a 6 year doubling means an 8x in 18 years. How many of us plan to be around in 20 years.
How does that work out?
Let us use some numbers: Start with $5,000.
The first doubling, 6 years later puts us at $10,000. After 12 years, we end up with $20,ooo. By the time we get to the end of the 18th year, we are looking at $40,000.
That is an 8X on the original $5,000.
LBI set a goal of 20% annually. Using this, we can see the goal for LBI is to double every 3.6 years. Of course, this gets exceeded when we factor in the activity which helps to increase the return.
During the first year, we saw the return top 60%. Using this same math, we see the doubling takes place every 1.2 years. This is why rate of return is crucial.
Compounding is vital. This formula exemplifies exactly why that is. A linear growth rate would mean that $5,000, in the previous example, at 12% pays $600 per year. At a non-compounded rate, over 18 years, that gives a payout of $10,800, or $15,800 total. This is much different from the $40,000 achieved via compounding.
It also exemplifies how time is crucial. We need to let the power of the Rule of 72 work its magic. This does not happen in a few months. We need to have a part of our portfolio stashed away where it is left alone to grow.
In cryptocurrency, it is easy to get lured in by the promise of huge returns. This is how rug pulls happen. Many are wooed by the idea of enormous payouts, hundreds (if not thousands of percent). However, they are short-lived.
The challenge is that we always have to weight the risk/reward scenario. How much return is really needed to grow an account when we understand the Power of 72? We have opportunities that are rather safe like Cub Kingdom paying 38%. Even as slight dip to 36% means a doubling every 2 years. It is true that it does not rival a 90% APR, the reality is one will get very wealthy off a 36% annual return.
It only requires enough time.
Hopefully this will help you in our investing. While people look for the homerun, the reason the fixed income market is so large is that is where people seek long term wealth generation. Sadly, in the traditional system, the hunt for yield means assuming more risk. Fortunately, in cryptocurrency, we can see opportunities that pay out great returns which do not have a ton of downside.
All of this is part of being an astute investor.
Hope this helps.
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