Ronnie the Rocket and the Rule of 72
When I first started trading stocks and options back in the turbo-boom dot-com days, there was this guy at the Chicago Board Options Exchange named Ronnie the Rocket. He was a nervous little guy with big ears and an endless stream of fast talk and big ideas.
We called him the Rocket because he would bet everything on one idea — the exact opposite of diversification. If AOL hit the customer growth number or Cisco sold enough routers that quarter, boom — he was rolling in it.
But the thing about the Rocket, and everyone with a gambler mentality for that matter, is that he just rolled his grubstake into the next bet and let it ride.
And when Ronnie ran out of money... well, he’d just talk some divorcée or the scion of a plutocrat into giving him another stake.
The last I heard of Ronnie the Rocket was that he hit the big score on a Russian internet service provider and had enough cash to pack it up and fly to Fiji.
I’m sure he’s burned through a few more fortunes, and widows, by now.
Know When to Hold Them
But say you’re not a gambler. You like to mitigate your risks and have cash in the bank after all your hard work.
Well, if you know this simple rule, you will double your money in stocks.
It’s called the Rule of 72, and it will give you a close estimate regarding how long it will take to double your money given a fixed annual rate of interest.
You simply divide 72 by the annual rate of return and discover how many years it will take to turn $1,000 into $2,000.
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.
A 2% annual return would take about 35 years. A 9% return would double your money at eight years. At 12%, it would take about six years.
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It’s the Fourth Grade Math Path to Wealth
Look at it this way: Over the last 25 years, the average annual return for the S&P 500 has been 9.61%, which would double your money in 7.5 years using a low-fee index fund.
As an aside, these are the top three low-cost S&P 500 index funds:
- Fidelity Spartan S&P 500 Index Investor Class (NASDAQ: FXAIX) — Net Expense Ratio: 0.015%
- Schwab S&P 500 Index Fund (NASDAQ: SWPPX) — Net Expense Ratio: 0.02%
- Vanguard 500 Index Fund Investor Shares (NASDAQ: VFINX) — Net Expense Ratio: 0.14%
So, say you start investing after college at age 22 with $5,000.
By the time you are 29.5, you have $10,000.
At 37, you have $20,000.
At 44.5, you have $40,000.
At 52, you have $80,000.
At 59.5, when you can start to take money out of your 401(k), you have $160,000.
That is, of course, if you left your money in and didn’t get shaken out by the crash of 2000 and 2009.
But say you didn’t start investing at the age of 22 (you had loans and you met that German girl), and now you’re a bit behind the eight ball. That’s where dividends come in. You reinvest your dividends and toss in some share price appreciation, and you can beat that 9.61% in the S&P 500.
I’ve found some companies that will pay you. Click here now to read more.
All the best,
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