If you're looking to start investing, you've probably come across something called “rule of 70” during your research. The rule of 70 is a basic mathematical formula commonly used to estimate how long it'll take for investments to double in value.
By giving you a rough estimate of your investment growth, this method can help you make strategic portfolio management decisions. In this article, we'll explain in detail what the rule of 70 is, how it works, and how to calculate it—including examples and alternative methods.
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What is the rule of 70?
Also known as “doubling time,” the rule of 70 is a mathematical formula used by investors to predict the number of years it will take for an investment to double in value. The base of the calculus is the rate return of said investment—you divide 70 by the rate return.
This rule can also be used to compare the growth pace of two—or more—different investments, giving investors the information needed to determine which one to choose. In economics, the rule of 70 is used to predict how long it might take for a country's gross domestic product (GDP) to double, dividing 70 by the GDP growth rate.
When it comes to investing, it's important to note that the rule of 70 only provides a rough estimate that assumes your investment will grow continuously, which might not always be the case. This means that there's a margin for error.
How does the rule of 70 work?
The rule of 70 is simple and straightforward. All you need to do is divide 70 by the annual rate of return or growth rate in the investment. Therefore, the rule of 70 equation would be 70/x, with “x” being the growth rate.
Rule of 70 example
Let's say you invest $15,000 at a 5% growth rate: 70/5=14. By the rule, this means your investment would take 14 years to double in value.
With an 8% growth rate, the same investment would take 8.75 years to double in value (8/70 = 8.75). And if your investment of $15,000 yielded an 11% rate return, it would take 6.4 years for the amount to double (70/11 = 6.3664).
Does the rule of 70 work?
As you can see by the examples above, the rule of 70 only takes the growth rate or rate of return of the investment into consideration, and no other variant. For this reason, it only provides a rough estimate, not a precise prediction.
Does this mean you can't trust the 70 rule? No—seasoned investors still use it for a reason. It is a reliable equation that can help you assess the growth potential of an investment, whether it is stocks, mutual funds, or a retirement portfolio.
For instance, if you want to retire in 25 years, the 70 rule can be useful to select a mix of investments with the potential of doubling in that amount of time. Since there is a margin for error—because not all investments compound continuously—you can use the equation as a base and make investment decisions, such as diversifying your portfolio throughout the years, that will help you achieve your goal.
Rule of 70 alternatives
Two popular alternatives for the rule of 70 are the rule of 69 and the rule of 72. Like the 70, both of these alternatives estimate the number of years it would take for an investment to double in amount, given a fixed annual rate of return.
To use the rule of 69, you divide 69 by the rate of return. For example, an investment of $20,000 at an 11% rate would take 6.3 years to double (69/11 = 6.273). The same applies to the rule of 72. An investment of $15,000 at a 10% rate of return will take approximately 7.2 years to double (72/10 = 7.2).
Similarly to the 70 rule, the 69 and the 72 rules only provide an estimate, not one hundred percent accurate data. But which is better? Generally, the 69 is considered more precise for continuous compounding intervals, while the 72 rule is deemed more accurate for annual compounding. On the other hand, the rule of 70 is assumed to be more precise for semi-annual compounding. These differences are just one more reason it’s important to know how your particular investments work.
FAQs
What is the rule of 70 in simple terms?
In simple terms, the rule of 70 is a basic equation used to estimate the doubling time of an investment—meaning, how many years it might take for an investment to double in amount. While not being flawless, the rule is used by investors to determine the potential of investments and is also used in other spaces, such as economics.
What is the rule of 70 in economics?
In economics, the rule of 70 is a mathematical formula used to estimate a country's gross domestic product (GDP) doubling potential—meaning the number of years it would take for it to double.
How to calculate the 70 rule?
If you want to calculate the doubling time of an investment with the rule of 70, the equation is 70/x, with “x“ being the growth rate of said investment. For example, for an $11,000 investment at a 5% growth rate, the calculus would be 70/5, which lets you know the investment will take 14 years to double.
What is the rule of 70 vs 72?
The rule of 70 estimates the doubling time for an investment by dividing 70 by the growth rate or annual rate of return (70/x). Similarly, the rule of 72 provides the same estimate but divides 72 by a fixed annual rate of return (72/x).
Why does the rule of 70 work?
The 70 rule works because it provides a reliable estimate of the doubling time for an investment. This allows investors to make informed decisions regarding their portfolio, applying the necessary adjustments and strategies to achieve their financial goals. (If you need some extra help managing your assets, take a look at these investment apps for beginners.)