INVESTMENTS:

How to Double Your Money using the “Rule of 72”:

(How to double your money in the shortest time possible).
Any investment will eventually double in value given the time. So the question remains, how soon do you think it will take to double any given amount of money? It pays to understand this basic math. We all want to invest, double or even quadruple our investments in the shortest time possible. That is why many of us choose to invest in high yield stocks, speculate in real estate, and business. While the future of any investment is never really guaranteed, the prospect of doubling your money is enough to make anyone excited.

How to Double Your Money…

The concept of doubling your money isn’t as hard as you may be lead to believe. There are numerous ways to do it – some easy and some not. For the conservative investor, it may seem like a scam but if you are willing to assume the risk, then it is very doable. Keeping in mind that the goal is to double your money in the shortest time possible, here are five ways you can invest and double your money:

1. Blue chip companies:

If you are a relatively conservative investor, you can buy blue chip companies. These companies have a high market capitalization, superior profitability, and a good dividend record. Examples of blue chips are contained in the NSE 20 share index. It is, however, important to note that not all shares in the index generate high returns year on year. Therefore, some stocks will be slower to double due to lower returns.

2. Stocks and bonds:

This is a conservative investment strategy that will earn you dividends and fixed income which can be reinvested over time to double your money. Combined stocks and bonds portfolio may attract an average return of 25% (an estimate based on some of the local market funds). As a result, it will take about 3 years to double your investment.

3. High growth stocks:

Growth stocks are expected to grow faster than the market and are usually higher risk investments. Some of the most popular high growth funds in Kenya have attracted an average return of approximately 30% over the last decade. Which means that you can double your money in about 2 years. However, keep in mind market volatility and shocks. This is an ideal case scenario.

4. Real estate:

Two ways to earn from real estate: rent or capital appreciation. Both ways could double your money. Kenya’s annual rental yield is 6.66% (Global Property Guide) and about a 10%-20% price increment depending on the area. Which means that it will take you about 3-12 years to double your investment.

5. Start-up business:

It is the fastest and riskiest way to double your money. It is hard to start a business and time consuming but the rewards are well worth it. For businesses, it a little harder to estimate the rate of growth due to the numerous variables to take into consideration. Keep in mind that all revenue isn’t created equal. However, on average, business grow by 5% -7% per week which translates to about 140% growth rate per year. Over time, the company stabilizes and generates a modest 20% -40% year on year growth rate. Hence, for a start-up, your investment can double in just half a year.



The Power of Compound Interest.

The easiest way to double your money is to invest in long-term, interest compounding investments. For instance, you can invest in government bonds. They are generally considered to have the lowest risk and are great for conservative investors. Government bonds 10-year average return are about 12% (inflation unadjusted return). Therefore, you will double your investment in about 6 years if you manage to reinvest your coupons at the same rate.
We use the rule of 72 to estimate how long it will take to double your money. However, as you apply this rule, keep in mind that the market fluctuates. The market can go up one year and down the next – even stay down for a couple of years. That is why you will the find the NSE 20 share index average return since inception is approximate -28%. It is therefore advisable to invest the money you don’t need for several years.

The Rule of 72:

The rule of 72 is pure math which is extremely useful to put your investment into perspective. It helps maximize the full potential of your investments. Additionally, the ‘rule of 72‘ is a simplified method used by millions to compute how long an investment takes to double. The time it takes for your investment to double is calculated by dividing the annual rate of return by 72. This formula will give you a rough estimate of the years it takes to double your investment.
For example, if you invest KES. 1M at 7%, it will take 10 years to turn it into 2M. Therefore, the higher the interest rate, the shorter the time it takes to for you to double your money.





The Rule of 115

Another rule, not so common though is the rule of 115. It measures how long it will take to triple your investment. It works, in the same way, the rule of 72 works i.e. by dividing the annual return of an investment by 115. By doing so, you will get the amount of time it will take to triple the money you have invested.
Suppose you stash away KES. 1M in savings account earning you 7% per annum (inflation unadjusted). It will take 16 years (115 divided by 7 equals 16.428) to triple that investment.
If you are very ambitious and would like to make sure your money is stretched to its reaches its fullest potential, this rule is just for you. As it will only take an additional 6 years to triple your money as opposed to 10 years to double it.

Bottom Line:

The rule of 72 is simple quick math to put the marathon of investing into perspective. Always clearly plan and think through your investments objectives to ensure that your money extends to its full potential. Happy Investing