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My Medical Device Sales Career

Rule of 72 Is a Fantastic Investment Formula

As many of you know, I am an active Stock Investor and Trader; some of you requested that I share tidbits of investing information that I have learned over the years that may be of interest to you to help you manage your own portfolios of hard earned money! The Rule of 72 has been known about for years by investors, it is about understanding how you can begin to getting your money working for you.  You do need to determine the right stock or investment to buy, but this will give you an understanding of the principal.   I cut and pasted some of the elements from this Article and want to give credit where credit is due:

http://www.investopedia.com/ask/answers/04/040104.asp#ixzz2Jr6PXQBu  (just click past the advertisement if one appears!) or you can read the cut and paste below from Investopedia:

The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself.


For example, the rule of 72 states that $1 invested at 10% would take 7.2 years ((72/10) = 7.2) to turn into $2. In reality, a 10% investment will take 7.3 years to double ((1.10^7.3 = 2).

When dealing with low rates of return, the Rule of 72 is fairly accurate. This chart compares the numbers given by the rule of 72 and the actual number of years it takes an investment to double.

Rate of Return Rule of 72 Actual # of Years Difference (#) of Years
2% 36.0 35 1.0
3% 24.0 23.45 0.6
5% 14.4 14.21 0.2
7% 10.3 10.24 0.0
9% 8.0 8.04 0.0
12% 6.0 6.12 0.1
25% 2.9 3.11 0.2
50% 1.4 1.71 0.3
72% 1.0 1.28 0.3
100% 0.7 1 0.3

So how would you use this?  If you are looking at a Dividend Stock paying a 5% Dividend and you had the dividends reinvested back into that stock (you can set it up that your dividends are going to buy more of that same stock automatically without a brokerage fee), then in about 14 years you would double your money.  In other words, $5,000 worth of a stock upon initial purchase would be now worth $10,000 about 14.2 years later.  This assume's the company is still viable and does not cut their dividend.  If you get a dividend grower, well it even lessens the amount of time to double your stock value!   Pretty cool!

I will begin to share more financial information from time to time and I hope you find it helpful!

Now go get a great job so you can begin finding the stock to buy to put the Rule of 72 to work for you!

 

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Tags: financial, investing information, rule of 72, stock

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