Double your money – limited time only!
By David Rose
Did you get sucked in by the title? Nowadays, we are bombarded with investment opportunities that offer much higher returns than the current miserly interest on our bank accounts.
But with these higher return opportunities comes risk, and when tempted by opportunity, rational decisions have a tendency to go out the window.
When enticed by higher returns, it can be easy to think, ‘If I put some (or all) of my money into this I can be rich. I’ll be able to double my money and then…’
We’re not considering what might be lost, only what might be gained.
But how do you know if something’s a good investment? Well, you could start by reading the fine print for warnings, such as:
- past performance is no guarantee of future performance, or
- please read the Product Disclosure Statement before investing.
Have you heard the saying that ‘property prices double every seven years’? Google shows 16.4 million results for these words. Can you guess the rate of return? With rounding, it’s 10 per cent.
I’m not here to agree or disagree with this, but to explain the investment philosophy.
Many years ago a smart individual worked out that the number 72 divided by the return equals the number of years it will take to double your money. This basic investing philosophy is called the Rule of 72.
If you earn 10 per cent per year it will take 7.2 years to double your money. An investment at 15 per cent will take just under five years to double. At five per cent it will take just over 14 years. Cash at two per cent will take 36 years.
The higher the expected return, the fewer years it will take to double your money. And the fewer years it takes, the higher the risk.
Over time we forget basic investment principals and fall for the glossy promotions and the money we can make. However, if you can remember the Rule of 72 you can decipher how risky an investment might be.