A Technical Investigation Into The Rule Of 72
The mathematics behind the mainstream investment rule!
The rule of 72 is a quick back-of-the-envelope investment calculation technique. Non-technical investors use the rule to estimate how long it would take to double an investment given a fixed rate of return. The rule of 72 has gained popularity among mainstream investors over the years primarily due to its simplicity.
For anyone just interested in the final result, it is an easy way to arrive at rough estimations. This way, they need not get involved in the mathematics behind the rule. However, there are certain costs involved in simplified mathematics that we cannot overlook.
In this article, I will dive into the mathematics behind this rule, and explore its limits in terms of the accuracy of results and assumptions involved.
How Does the Rule of 72 Work?
Let us say that you are the typical non-technical investor. You have discovered an investment opportunity that gives you a fixed yearly compounded rate of return, say, 6%. You have an investment capital of 1000 monetary units at your disposal. You are now interested in (mentally) estimating how long it would take for this capital to double if you chose to invest.
