72 has an amazing mathematical property - it helps us determine how many years it takes for our Money to double given a specific Growth Rate Percentage (CAGR - Compound Average Growth Rate).
- If your Money grows at 10% a year then it will take 7 years to double.
- If your Money grows at 5% a year it will take 14 years to double.
- If your Money grows at 7% a year it will take 10 years to double.
- If your Money grows at 3% a year it will take 24 years to double (this is probably a sensible growth rate for Cash in the bank - gulp).
Can you see a pattern?
You can use it the other way as well - “What growth rate do I need to double my cash in 4 years?” Answer - 72 divided by 4 is roughly 18%.
The drawback is that it tends to fail on low numbers of years and large growth rates - i.e. if your cash grew at 30% a year, 72 suggests it would take 2 and a bit years - in practice it would be slightly different.
How is this useful?
It helps us get realistic expectations about what we can achieve.
Roughly speaking, the long term growth rate of the FTSE100 is about 7% a year (I think this excludes dividends). So, if we just track the FTSE100, then we can expect our Money to double in about 10 years.
So, a realistic, but conservative, growth rate for our portfolios is about 10% - this means we are just beating the FTSE100 - this must be possible on a Long Term basis but will require effort. At 10% a year, our money will double in 7 years.
If we are a bit better than this - maybe by using a bit of gearing with Spreadbets or just by being a bit sharper than the average tool - we might be able to hit 12% over the Long Term - this would double our dosh every 6 years.
OK, let’s say we are really flippin’ good at this and can hit 15% a year - although this is unlikely as we are getting to near Warren Buffett levels of gains. In this case, we would double our money every 4 and a half years ish.
Now, for real ultimate dreaming - let’s just do the maths on 20% a year - THIS WILL NOT HAPPEN, so pointless really - but I suspect that Robbie Burns does achieve this - your money would double in 3 and a half years……
This is a key element of how we should be planning our Investments and Lifestyle / Retirement plans and Expected CAGR is arguably one of the first concepts we need to nail down. If you aim for 10% then you are about bang on the mark - anything higher than this is probably unrealistic - especially if you have Full Time work commitments and other drags on your time - if you aim for much higher, you will simply be taking on too much risk. I look for about 10% to 15% on my portfolio but I use Spreadbetting for leverage and I do not have a ‘proper job‘.
I knew you would like it !!