Darren Winters looks at how long it takes to double your money?
The Rule of 72 formula is used by investors to calculate how long it takes to double an investment at a given annual rate of return.
investors calculate the formula by dividing 72 by the annual rate of return.
For example, if a cash deposit account pays 6% interest, how long would it take to double your money by applying the Rule of 72?
So, given the annual rate of return is 6, then the Rule of 72 equals 72 divided by 6, which is 12 years.
In other words, an investment paying 6% per annum would take 12 years to double your money, applying Rule 72.
What was the average rate of return of various assets from 1928-2022, and how long did it take an investor to double their money?
Orthodox investor thinking is to assign various investment classes such as stocks, cryptocurrencies, bonds, real estate and precious metals with certain risk levels.
This thinking classifies stocks and cryptos at the high end of the risk spectrum and bonds, real estate and precious metals at the low end of the risk spectrum.
But I will shatter this reasoning, which has given investors a false sense of security.
In the wildest of wild cards, human behaviour is unpredictable, which, in a market, determines prices. A market influenced by central bank liquidity is also driven by the human behaviour of a smaller group of people, policymakers.
So, applying logic and reasoning and compartmentalising assets into high and low risk without factoring in the asset’s price range gives investors a false sense of security, which could potentially lead to spectacular losses.
Investors who bought gold near the 2000 USD price range in the last financial crisis in 2009 needed 14 years to break even and, in real terms, have lost money.
Moreover, investors who piled into long-maturity 30-year US treasury notes in 2020 August have experienced a 40% market-to-market loss of their investment capital loss. The latter market rout in long maturity treasuries due to endless underlying inflation is the crux to the 2023 three bank failures and current global liquidity banking crisis.
Precious metals and long-maturity treasury bills are perceived as low risk on the risk spectrum, and this false sense of security investing has contributed to the current banking crisis.
In short, there is no such thing as a safe haven asset. An asset has a price, and if an investor overpays for it, they will lose money.
So, how long it takes to double your money depends on what price you pay for the asset. If an investor buys an asset at bargain basement prices, then they could double their money in less than a year. But that same investor might need to wait many years to break even if they overpaid for the same asset.
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful,” Warren Buffett.
Various asset classes and duration to double your money
So let’s look at different asset classes and assume the investor buys the asset at an average price; how long would it take for that investor to double their money, applying Rule of 72?
The historical asset return (1928-2022) of a 3-Month Treasury Bill at a yield of 3.32% would take 21 years for you to double your money.
Real Estate provided a 4.42% average return in the same period, so it would take 16 years to double your money.
The US T Bond yielding 4.87% over the same period would double your money in 14 years.
What about Gold appreciating, on average 6.48% over the period (1928-2022)? It would take a Gold investor 11 years to double their money.
But, the caveat is the price at which the investor buys the asset. Buying gold at near the top price of 2000 USD during the last 2008 financial crisis and the investor has not doubled their money.
Corporate Bonds yield 9.96%, and you would double your money in 10 years.
Then there are high-risk reward stocks with the S&P 500, with an average annual return of 11.5%, which would take 6 years to double your money.
So the safest of all assets is the 3 months treasury, which doubles about every 21 years.
Interestingly, real estate assets had returns of 4.4%, doubling roughly every 16 years. Between 1928 and 2022, the value of $100 invested in real estate assets would be worth $5,121.52. By contrast, the value of $100 invested in the S&P 500, including reinvested dividends, would have reached over $624,000.
So what the data shows is that a diversified portfolio of stocks in the S&P 500 between 1928 and 2022 provides the greatest capital appreciation and is the quickest way for you to double your money.
But income for retirement and residential real estate has been the best income inflation protection asset class.
Darren Winters points out that real estate is prone to political risks where policy favours tenants over landlords.
But in a market hijacked by central bank liquidity, perhaps it is best not to worry about the duration of the investment but rather where prices sit concerning the central bank’s liquidity cycle.
When central banks were accommodating, real estate was worth as much as a buyer could borrow.
Is seeking alpha about not buying at an average price but bargain basement price when central bank liquidity has hit a trough?