Usually, while making an investment, one major factor an investor looks out for is the returns. The aim of every investor is to make good profits with no risks involved. While making an investment, any investor would want to know how much they are gonna make on their investments as it would help them in planning their further activities with the investment returns like buying their dream house, putting it in the retirement funds, kid’s education and much more.
Rule of 70 is such a concept that will help the investors calculate the returns on their investments, that is it gives an estimation of how much time an investment takes to get doubled. It will derive a rough estimate of the investment period taken to reach double of what is invested. It is also infamously called the “Doubling Time” of an investment.
Working of Rule of 70
The Rule of 70 is a simple math equation which you’ll use to calculate the number of years it can take to double the investment amount. While using the “Rule of 70” make sure you have the annual growth rate of the investment.
- First, find out the investment’s annual growth rate
- Divide 70 with the annual growth rate
- The result will be the number of years it can take for the investment to get doubled
70 / Investment’s Annual Growth Rate = number of years it can take to double your investment
For example, Let’s take an investment of AED 10,000 made for a period of 6 months and the return after 6 months is AED 15,000.
To calculate the annual growth rate,
Profit on the investment = Total Returns – Amount Invested
= 15,000 – 10,000
Growth Rate = (Profit / Amount Invested) * (12/ months of investment) * 100
Having a growth rate of 100%, The Doubling Time = 70/100 = 0.7 years. Hence it would take 0.7 years for the investment of AED 10,000 to double at the growth rate of 100%.
Also, check: Investment Diversification-How does it work?
Advantages of Rule of 70
The Rule of 70 will determine the time taken for an investment to get doubled. There are some key benefits of the rule of 70 like,
- Simple math for the investors to quickly determine the time takes to gain doubled returns without complex formulas
- To determine the investment growth rate
- To plan further with the return of the investment
- Can be useful to determine the time taken when you compare two different investments with different growth rates
Difference between Rule of 70 and Rule of 72
The Rule of 70 and Rule of 72 are almost the same. Both the rules are used to find out the years it can take to double the investment. But in Rule of 72, the dividend is 72 instead of 70. Both derive the same results.
The Rule of 70 gives an approximate result for the investors using the growth rate of the investment. It can be used for any investment Stocks, Mutual Funds, Real Estate, Bonds, Deposits, etc. Be it short term or long term, the principle of Rule of 70 is the same.
Though the Rule of 70 is widely used by investment and financial planners, the results are not accurate. However, in reality, with the market fluctuations considered the doubling time can vary. Fortunately, if the growth rate is the same as per your calculation then doubling time will be exactly as per the prediction.