The idea that stocks double every 7 years is a common one, but is it accurate? The answer is a bit more nuanced
The Rule of 72
The idea that stocks double every 7 years is based on the Rule of 72. This rule states that you can divide 72 by the annual rate of return to get the number of years it will take for your investment to double. For example, if the annual rate of return is 10%, it will take 7.2 years for your investment to double
Historical Returns of the S&P 500
The S&P 500 is a stock market index that tracks the performance of 500 large-cap companies in the United States It is often used as a benchmark for the overall stock market
The historical annual return of the S&P 500 is about 10%. This means that, on average, the S&P 500 has doubled in value every 7.2 years. However, it is important to note that this is just an average. The actual return of the S&P 500 in any given year can vary significantly.
Factors that Affect Stock Returns
There are a number of factors that can affect stock returns, including:
- Economic growth: A strong economy typically leads to higher stock returns.
- Interest rates: Low interest rates make stocks more attractive to investors, which can lead to higher stock returns.
- Inflation: Inflation can erode the value of your investments, which can lead to lower stock returns.
- Geopolitical events: Wars, natural disasters, and other geopolitical events can all have a significant impact on stock returns.
The idea that stocks double every 7 years is a simplification. While the S&P 500 has historically doubled in value about every 7.2 years, this is just an average. The actual return of the S&P 500 in any given year can vary significantly. There are a number of factors that can affect stock returns, including economic growth,
How the Rule of 72 Works
The Rule of 2072%, for instance, stipulates that 1% invested at an annual fixed interest rate of 2010% would require 207 2 years ((72/10) = 7. 2) to grow to $2. In reality, a 10% investment will take 7. 3 years to double (1. 107. 3 = 2).
When rates of return are low, the Rule of 72 is largely accurate. The numbers provided by the Rule of 72 are contrasted with the real number of years needed for an investment to double in the chart below.
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 |
Observe that the Rule of 72 is less accurate as rates of return rise, even though it still provides an estimate.
Does the Rule of 72 Work for Stocks?
You cannot use the Rule of 72 to calculate how long it will take to double your money if you invest in stocks because they do not have a fixed rate of return. You can still use it, though, to calculate the average annual return you would require to double your money in a predetermined period of time. Divide 72 by the number of years you hope it will take to double your money rather than by the rate of return. For instance, divide 72 by 8 if you wish to double your money in eight years. This indicates that in order to double your money in that amount of time, you require an average annual return of 9%.
Cramer: How compounding can help you double your money in 7 years
FAQ
Should your investment double every 7 years?
How often do stocks double?
Is 7% annual return realistic?
What is the 7 rule in stocks?
How often should you double your investment?
At 10%, you could double your initial investment every seven years (72 divided by 10). In a less-risky investment such as bonds, which have averaged a return of about 5% to 6% over the same period, you could expect to double your money in about 12 years (72 divided by 6).
How long does it take to Double A 10% investment?
In reality, a 10% investment will take 7.3 years to double (1.10 7.3 = 2). The Rule of 72 is reasonably accurate for low rates of return. The chart below compares the numbers given by the Rule of 72 and the actual number of years it takes an investment to double.
How long does it take for a 10% interest rate to double?
For more precise outcomes, divide 69.3 by the rate of return. While not as easy to do in one’s head, it is more accurate. For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ( (72/10) = 7.2) to grow to $2. In reality, a 10% investment will take 7.3 years to double (1.10 7.3 = 2).
Can you take money out of the stock market in 10 years?
Keep in mind that we’re talking about annualized returns or long-term averages. In any given year, stocks might return 25% or lose 30%. Over a long period, the returns will average out to 10%. The Rule of 72 doesn’t mean that you’ll be able to take your money out of the stock market in 10 years.