The rule of 70 is a simple mathematical formula that can be used to approximate how long it takes for an investment to double in value. It’s similar to the rule of 72 and the rule of 69, but has slightly different applications.
Let’s examine what the rule of 70 is, how it works, and how it’s used to estimate an investment’s long-term returns.
Definition and Examples of the Rule of 70
Investors typically use the rule of 70 to predict the number of years it takes for an investment to double in value based on a specific rate of return (an investment’s gain or loss over a period of time).
The rule of 70 is commonly used to compare investments with different annual interest rates. This makes it simple for investors to figure out how long it may be before they see similar returns on their money from each of the investments.
Let’s say an investor decides to compare rates of return on the investments in their retirement portfolio to get an idea of how long it may take their savings to double. To calculate the doubling time, the investor would simply divide 70 by the annual rate of return. Here’s an example:
- At a 4% growth rate, it would take 17.5 years for a portfolio to double (70/4)
- At a 7% growth rate, it would take 10 years to double (70/7)
- At an 11% growth rate, it would take 6.4 years to double (70/11)
- Alternate name: Doubling time
How the Rule of 70 Works
Now that you’ve seen the rule of 70 in action, let’s break down the formula so you understand how to apply the rule of 70 to your own investments.
Again, calculating the rule of 70 is pretty straightforward. All you do is divide 70 by the estimated annual rate of return to find out how many years it’ll take for an investment to double in size. For the calculation to work properly, you’ll need to have at least an estimate of the investment’s annual growth or return rate.
Do I Need the Rule of 70?
Keep in mind that the rule of 70 is a rough estimate, but it can come in handy if you want a more concrete way of looking at the potential of a retirement portfolio, mutual fund, or other investment than the interest rate alone could provide. Knowing the number of years it could take to reach a desired value can help you plan which investments to choose for your retirement portfolio, for example.
Let’s say you wanted to pick a precise mix of investments with the potential to grow to a certain value by the time you retire in 20 years. You could use the rule of 70 to calculate the doubling time for each investment under consideration to see if it could help you reach your savings goals by the time you retire.
The rule of 70 has other applications outside of the investment space. For example, the rule of 70 can be used to predict how long it would take for a country's real GDP to double.
Alternatives to the Rule of 70
The rule of 69 and the rule of 72 are two alternatives to the rule of 70. They differ in their accuracy for investments with different compounding frequencies (which measure how often your interest compounds). Both calculations function similarly to the rule of 70, except they divide the annual rate of return by 69 and 72, respectively, to derive the doubling time.
In general, the rule of 69 is considered to be more accurate for calculating doubling time for continuously compounding intervals, especially at lower interest rates. The rule of 70 is deemed more accurate for semi-annual compounding, while the rule of 72 tends to be more accurate for annual compounding.
Pros and Cons of the Rule of 70
While the rule of 70 has some impressive benefits, it also has some downsides:
|Strong investment growth prediction model||Only an estimate|
|Straightforward formula||Relies on flawed assumptions|
- Strong investment growth prediction model. The rule of 70 makes it easy to estimate the number of years it may take for an investment to double in value.
- Straightforward formula. To use the rule of 70, all you have to do is divide 70 by the annual rate of return.
- Only an estimate. While the rule of 70 can provide a well-informed projection of how long it may take an investment’s value to double, the calculation is only an estimate. In addition, that estimate can be thrown off by fluctuating growth rates.
- Relies on flawed assumptions. Another reason the rule of 70 isn’t always accurate is because it assumes an investment compounds continuously. However, most financial institutions calculate interest less frequently, so this assumption is inherently flawed when it comes to the rule of 70 and its ability to accurately predict growth. (The rule of 69 may be more accurate for continuously compounding investments.)
- The rule of 70 is a basic formula used to estimate how long it will take for an investment to double in value.
- To use the rule of 70, simply divide 70 by the annual rate of return.
- The rule of 70 only provides an estimate, not a guarantee, of an investment’s growth potential.