Learn the Rule of 70 for Investment Growth

Have you ever wondered how long it could take for your investment to double in value? Or how quickly a country’s economy might grow over time? The answer could lie in a concept known as the rule of 70 (Sometimes referred to as the Rule of 72, but the concept is the same either way). This formula allows you to estimate the doubling time of various financial and economic metrics.

The rule of 70 is a quick way to calculate how many years it could take for a quantity to possibly double, given a specific growth rate. By dividing 70 by the annual growth rate, you can get a rough estimate of the doubling time. This tool is helpful for investors, economists, and anyone interested in understanding the power of compounding growth.

Key Takeaways of the Rule of 70

• The rule of 70 is a way to estimate the doubling time of a quantity based on its growth rate.
• To use it, divide 70 by the annual growth rate (in percent).
• It’s a simplified way to understand exponential growth without complex calculations.
• The rule assumes a constant growth rate, so it’s an approximation rather than an exact figure.
• It’s useful for comparing different investments or growth rates.

What Is the Rule of 70?

The rule of 70 is a straightforward way to figure out how long it’ll take for something to hypothetically double. Whether we’re talking about the growth rate of the economy or your retirement portfolio, this formula could come in handy.

Here’s the idea: take the number 70 and divide it by the growth rate (in percent). Now you have a rough estimate of the doubling time. It’s not an exact science, but it’s a quick way to understand exponential growth.

The Rule of 70 Formula

• Estimate the annual growth rate (in percent)
• Divide 70 by that growth rate
• The result is the approximate time it takes for the quantity to potentially double

The future growth rate is unknown, so we need to make predictions based on historical performance. For instance, someone may invest in the S&P 500. They may look back at the performance of that for the past 50 years and see that the growth rate was about 9%. So, they use that % as their expected growth rate.

Consider the following hypothetical example. Take an investment with an 8% annual return, for instance. Apply the rule of 70, and you’ll find it hypothetically doubles in a surprisingly short 8.75 years (divide 70 by 8).

Doubling Times: Actual vs. Rule of 70 Estimates

When looking at how money could grow over time, many financial professionals use a simple calculation method. This approach, which divides 70 by a growth rate percentage, may provide a general estimate for how long it might take money to double.

Let’s examine how this calculation works at different growth rates:

Lower Growth Rates (0.25% – 4%)

• When growth rates stay below 4%, the calculation tends to provide estimates that could differ by about 1% from actual mathematical results
• At 2%, calculations suggest a potential doubling period of around 35 years

Higher Growth Rates (Above 4%)

• As rates move higher, the calculation might become less precise
• For instance, with a 20% rate, calculations indicate roughly 3.5 years to double, while detailed math shows about 3.8 years

Understanding these time periods could help when thinking about different investment approaches. Each person’s situation differs, and growth rates may vary significantly over time. Working with a financial professional could help you consider which approaches might align with your goals.

Using the Rule of 70 to Estimate Economic Growth

Applying the Rule of 70 to GDP Growth

Gross domestic product (GDP) is the total value of goods and services a country cranks out. It’s a key measure of economic growth. So, how can the rule of 70 help you here?

Let’s say a country’s GDP is growing at a steady 3% per year. Put that into the rule of 70 formula, and we get:

If you grab your calculator and punch in 70 divided by 3, you’ll get 23.3 as the answer.

Assuming the 3% growth rate holds steady, the country’s economy will hypothetically doubling in size in just 23 years. That’s crucial intel for policymakers and investors trying to assess the possible odds of long-term prosperity.

Limitations of the Rule of 70 in Economic Growth

Now, before we get too carried away, let’s remember that the rule of 70 has its limits. Economic growth is rarely a smooth, constant ride. Recessions, booms, and all sorts of external factors can make the growth rate bounce around.

Plus, the rule of 70 doesn’t account for inflation or population growth, which can skew the real GDP figures. So, while it’s a handy rule of thumb, it’s not gospel.

Real-World Examples of the Rule of 70 in Economics

To see the rule of 70 in action, let’s look at a real-world case: China’s economic boom. From 1978 to 2010, China’s GDP grew at a rate of 10% per year on average.

Using the rule of 70, we can estimate that China’s economy was doubling in size every 7 years during that period (70 / 10 = 7). And sure enough, China went from a relatively small economy to the world’s second-largest in just a few decades.

The Rule of 70 in Investing and Retirement Planning

Cash is king, and for good reason. When it comes to building a good financial future, savvy investors and retirement planners know that the rule of 70 can be a valuable tool to have in their back pocket.

Estimating Potential Investment Doubling Time with the Rule of 70

When you’re investing for the long haul, like for retirement, you want your money to grow. The rule of 70 can help give you a rough idea of how long it might take for your investment to double in value.

Let’s say you’ve got a portfolio that you expect could potentially return 6% annually. The rule of 70 tells us that your investment would hypothetically double in about 11.7 years (70 / 6 = 11.7).

Now, this assumes that a 6% return stays constant, which is a big assumption. Markets go up and down, and returns can vary wildly from year to year. But as a quick estimate, the rule of 70 can possibly be helpful.

Using the Rule of 70 to Compare Investments

You’re considering two mutual funds, but which one is the better bet? The rule of 70 can possibly help you make a side-by-side comparison and pick the one that’s right for you. Below were the historical returns, not the projected returns.

• Fund A has an average annual return of 5%
• Fund B has an average annual return of 8%

Using the rule of 70, we can estimate that:

• Fund A would take about 14 years to double (70 / 5 = 14)
• Fund B would take about 8.75 years to double (70 / 8 = 8.75)

Comparing growth prospects, Fund B comes out on top. While it’s not the only consideration, the rule of 70 can offers a useful benchmark to weigh your options.

Limitations of the Rule of 70 in Investing

As with economic growth, the rule of 70 has its limitations when it comes to investing. It assumes a constant growth rate, which is rarely the case in the real world.

The way investments perform can be all over the map from one year to the next. And if you’re not careful, expenses like fees, taxes, and inflation can slowly but surely eat into your returns. Oh, and let’s not forget the added risk that often comes with pursuing higher rewards.

So while the rule of 70 can be a useful quick estimate, it’s no substitute for thorough research and a well-thought-out investment strategy.

Understanding Exponential Growth with the Rule of 70

The rule of 70 is about understanding exponential growth. Let’s explore that concept a bit more.

The Rule of 70 and Continuous Compounding

Exponential growth happens when a quantity increases by a constant percentage over some time. This is the kind of growth the rule of 70 is based on.

In the investing world, this is often tied to the idea of continuous compounding. That’s when interest is constantly being added to the principal, so the interest itself starts earning interest. It’s like a snowball rolling down a hill, potentially getting bigger and bigger as it goes.

The rule of 70 gives us a quick way to estimate how long that snowball might take to double in size, based on its growth rate. It’s not an exact figure, but it can be a handy approximation.

Exponential Growth Concepts Explained by the Rule of 70

Take a closer look at exponential growth, and you’ll find the rule of 70 can be a powerful guide. Even growth rates that seem slow and steady can have a profound impact when given enough time to build momentum.

Let’s say you’ve got a savings account that earns 1% interest per year. That might not seem like much, but the rule of 70 tells us that your money would double in about 70 years at that rate (70 / 1 = 70).

Now, if you could increase that interest rate hypothetically up to 7%, your money could potentially double in just 10 years (70 / 7 = 10). That’s a big difference.

Limitations of the Rule of 70 in Managing Exponential Growth

Growth rates can be unpredictable, and the rule of 70, while useful, isn’t a magic formula for controlling exponential growth. The truth is, growth rates often slow down or speed up, and exponential growth eventually reaches a plateau.

Growth rate is not infinite. At some point, an economy will stall due to constraints like limited resources or a saturated market, no matter how well it’s performing.

So while the rule of 70 can help us understand the potential of exponential growth, it’s not a substitute for more nuanced, context-specific analysis and planning.

Comparing the Rule of 70 to Other Doubling Time Rules

So, do you think you know all about doubling times? Think again. The rule of 70 is just the tip of the iceberg, and we’re about to dive into the alternatives.

Rule of 70 vs. Rule of 72

You might have heard of the rule of 72. It’s pretty similar to the rule of 70, but it uses 72 instead of 70 in the formula.

The rule of 72 is often used for more precise estimates, especially for interest rates or growth rates between 6% and 10%. For example:

• At a 6% growth rate, the rule of 72 estimates a doubling time of 12 years (72 / 6 = 12), while the rule of 70 estimates 11.7 years (70 / 6 = 11.7).
• At a 9% growth rate, the rule of 72 estimates a doubling time of 8 years (72 / 9 = 8), while the rule of 70 estimates 7.8 years (70 / 9 = 7.8).

So the rule of 72 might give you a slightly more accurate estimate, especially in that 6-10% range. But for most purposes, the rule of 70 and the rule of 72 will give you similar ballpark figures.

The Rule of 69 and Other Variations

There are other variations on the doubling time rule, like the rule of 69. This one uses 69 instead of 70 or 72, and it’s often used for continuous compounding situations.

The rule of 69 is based on the natural logarithm of 2, which is about 0.69. So it’s a bit more mathematically accurate than the rule of 70 or 72, which are easier to work with for mental math.

There are also rules for other multiples, like the rule of 114 for tripling times, or the rule of 35 for half-lives (the time it takes for a quantity to halve in value).

When to Use Each Doubling Time Rule

So with all these rules, which one should you use? It depends on the situation and the level of precision you need.

For most quick estimates, the rule of 70 may work just fine. It’s easy to remember and work with, and it gives you a good rough estimate.

If you want a bit more precision, especially for growth rates in the 6-10% range, the rule of 72 might be a better choice. And if you’re working with continuous compounding or need more mathematical rigor, the rule of 69 is there for you.

But in most practical situations, the differences between these rules are pretty small. They all give you a way to quickly estimate doubling times and understand the power of exponential growth.

The Rule of 70: Final Thoughts

The rule of 70 is a helpful tool that can help you make informed decisions about your investments and understand the potential growth of various economic indicators. By providing a quick estimate of doubling times, this rule allows you to set realistic expectations and plan for the future.

However, it’s essential to remember that the rule of 70 is just an approximation.

In the real world, growth rates can fluctuate, and unforeseen events can impact the actual doubling time. Despite these limitations, the rule of 70 remains a valuable starting point for understanding the power of compounding growth.

For more information on this or other investment topics, feel free to schedule a no-obligation call with our team.

Investing involves risk, including loss of principal. Performance investment return and principal value will fluctuate, so investors may have a gain or loss when shares are sold.