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If you hang around in investment circles for long enough, you’re bound to run across the idea of “the Rule of 72.” But what exactly is this investment maxim, how does it work, and why is it so important?

Introducing the Rule of 72

The most “101” way of describing the Rule of 72 is its ratio of division which helps you calculate how long it should take your portfolio to double in size. Essentially, what you do is calculate the fixed rate of a return, divide it by 72, and you get the estimated time it will take for the doubling to occur. Some like to take things a step further with the Rule of 115, which is the same but for calculating how long it will take to triple the figure.

For example, if you have an annual return of 7%, you’d divide 72 by 7 and get 10.29 as the estimated years it’ll take for that option to double.

Pros and Cons

Now, “estimated” is key here – this isn’t an exact science. Still, it can provide a nice baseline. If you’re just starting out, or want a quick estimate, the Rule of 72 is a lot easier than trying to deal with a bunch of complicated formulas. If you’re looking for a quick snapshot of how long an annual return will take to double, what its growth trajectory is, and thus if it’s a good investment or not, this is as easy as it gets.

However, easy isn’t always super accurate, nor is it meant to be. As mentioned, this isn’t an exact measurement, and that can pose problems. For example, it assumes a fixed rate of return, which may not be the case for the stock you’re considering. It also works better for return rates which fall between 6% and 10%. Those rates are common (hence why this is good for beginners and quick snapshots) but the “Rule” does start to degrade in accuracy on either side of those rates.

Still, the Rule of 72 is a neat little computing trick to help you get started in stock appraisal.