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Monday, June 8, 2009

How Long Will It Take To Double The Value Of My Investment?

Many of my friends started asking how long will it take to make their money from their investment, or to be exact - how long will it take to double the value of their investments? It is important to have rough idea of what we are going to gain (or lose) at the end of an investment period. This will help us to make better decisions on where to invest our hard-earned money.

First, we must understand that there are 3 most important factors that will affect our investment returns.

  • Impact of Inflation
  • Result of Compounding Interest
  • Impact of Taxation

Having this in mind,theoretically, there is a very simple rule that can be used to answer our question. It is known as 'The Rule of 72'. Basically, 'The Rule of 72' can help us to estimate:
  • how long will it take to double the value of their investments at a given rate of return
  • the loss in real value of a given amount of funds with a particular inflation rate
Since it can be used to calculate the no. of years whether to double your investment or the loss in real value of your investment, the formula is given as:

72/given rate of inflation or return = No. of years

Example 1:
Mr. A has RM 150,000 and wants to know how long will take to halve its real value with an inflation rate of 3.5% per annum.

72/3.5 = 20.6 years

This simply means that the RM 150,000 will not have the purchasing power it has currently. Even though you have the same amount of money, in 20.6 years, it can only make purchases worth today's RM 75,000.

Example 2:
Mr. B has RM 100,000 and would like to know how long will it take to double his money, given the rate of return as 7.5% per annum.

72/7.5 = 9.6 years

This is quite straightforward, in 9.6 years, your RM 100,000 will become RM 200,000.

Being equipped with this basic info on investment, I hope you guys can look out for investment tools that can cater for your needs. Just one more point to add - usually this calculation is used for in mutual funds. However, you must always remember that the rate of returns are assumptions that is based on past performance that may not hold true for the future.

The safe way to double your money is to fold it over once and put it in your pocket. ~Frank Hubbard

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