When asked "What was the most amazing invention of the 20th century?," Albert Einstein replied, "Compounding interest."
The following model is what financial experts call the "Rule of 72's."
The Rule of 72's
This rule is a law of arithmetic; Using the Rule of 72's you can determine how many years it would take for your investment to double.
In the Real-world market place, it is neither unheard of, nor unreasonable, to expect a 12% annual return on your money. Using this figure, you take 72, divided by 12 (your expected rate of return) to get six (6).
Translation:Your money will double every six years.
Illustrated
Year
1. $100.00 x 112% = $112.00
2. $112.00 x 112% = $125.44
3. $125.44 x 112% = $140.49
4. $140.49 x 112% = $157.35
5. $157.35 x 112% = $176.23
6. $176.23 x 112% = $197.38
7. Close enough.....
In 6 years, $100 becomes $197!
Q.:What does this mean in the Wide World of Wall Street Sports™?
A.: If all of your money was invested in stock that returned a nightly bonus of 12%, your portfolio would double every six days!
The catch, here, is that as your portfolio grows, you can never spend ALL of your money on stocks that will get you that kind of return; There simply aren't enough buyable events occurring which will generate 12% returns on a nightly basis.
