Investing Beyond The Noise podcast: Mike Ross explains how 'The Rule of 72' can help a 21-year old investor earn $2.5 million by the age of 50
Meet Mike Ross, President of Van Clemens & Co.
Hi, my name is Mike Ross. I'm president of Van Clemens & Co. As many of you have listened to previous podcasts by Tim Clarkson, I'd like you to know that Tim and I are partners in the firm and have worked together for over 37 years. We share the same passion and ideology for the market. Before we get started on today's topic, I'd like to share a couple of my favorite sayings I tell my kids. The first is the only way to financially get ahead in life is to either make more money, spend less money, or a combination of both. The second saying is a famous quote by Abraham Lincoln: "I'm a slow walker, but I never walk backward." These quotes are appropriate for today's topic.
What is the Rule of 72 and how can it make me wealthy?
The concept I want to explain today is something called the Rule of 72. Some of you may have already heard of it; it’s kind of like Newton's law of gravity only in the financial sense. It's reliable, never changes and in today's world of uncertainty, we need all the help we can get. It works like this: whatever your rate of return is divide it into 72, and that will give you the number of years it will take for your money to double.
Listen to Investing Beyond The Noise - Episode 6
Here is an example of the Rule of 72
I think the best way to illustrate it is by an example. Here's a little speech I've given my customers multiple times over the years, and for those of you listening, sorry for the repeat. So, let's say 21-year-old Olivia calls me up and asks me what her $10,000 would grow to if she received a 20% rate of return and what it would look like by the time she's 50 years old. Okay, since 20 goes into 72 3.6 times, in 3.6 years 10,000 will become $20,000. $20,000 will turn into $40,000 in 7.2 years. $40,000 will turn into 80,000 in 10.8 years. 80,000 will become 160,000 in 14.4 years. 160,000 turns into 320,000 in 18 years. 320,000 will be worth 640,000 in 21.6 years. 640,000 will become 1,280,000 in 25.2 years. And finally, 1,280,000 will become 2,560,000 in 28.8 years. So, by the time Olivia is 50 years old, that $10,000 compounding at a rate of 20% will be worth over two-and-a-half million. That is not only magical, but it is also true. Now, given today's rate of inflation, that's probably how much it'll take for us to fill up the car. But at any rate, it is a great aid and a great way to measure a company's financial performance.
So do a quick and easy calculation on a company. Take the previous year’s stockholders’ equity and divide it into the current year-end equity. Let’s say a company at year-end 2020 had $1 million of equity. At the year-end of 2021, the equity is now $1.2 million. That’s a 20 percent return on equity. It's a simple concept. It's a great tool that I've used extensively over the years. I want to thank you for listening and feel free to give us a call, (612)758-9140, for some common sense analysis of the ever-changing financial picture.
Related: Learn more stock market keys to success
Hanging on to your winners- Episode 1
Value investing and the PE Ratio - Episode 2
Have a diversification mindset - Episode 3
Disclaimer
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