Einstein 
was a pretty smart guy. And while Einstein didn’t invent the “Rule of 72” (it was first advanced by Luca Pacioli in 1494), he is credited with declaring it the “ninth wonder of the world.”
What is the Rule of 72 – and why is it so important?
The rule of 72 reveals the power of compound interest – the most significant element in the entire financial world.
By dividing an interest rate into 72, we can know how long it will take for a sum to double.
Stay with me – don’t let those eyes gloss over yet – the good stuff is coming!
At 6%, money will double every 12 years (72/6=12); but at 12%, money will double every 6 years (72/12=6). So in 36 years, a 6% rate will double our money three times (3 X 12-year periods), and at 12%, our money will double 6 times (12 X 6-year periods).
Look at the difference.
|
12% Compound Growth |
6% Compound Growth |
|
| Beginning Value |
$100,000 |
$100,000 |
| Value in 36 years |
$6,400,000 |
$800,000 |
The operative word in the term compound interest – is “compound.” Money ceases to “compound” if its growth is interrupted by a loss – which resets the compounding clock and starts the process all over again.
For example, if we interrupt the 12% compound growth pattern in year 10 with a small 5% loss (35 years of 12% annual growth – with a 5% loss thrown in at year 10), instead of ending up with $6.4 million, we’ll have just $5.4 million.
While most of us would be happy to settle for either figure – who would have thought a 10% loss in one year over an investing lifetime could cost us $1,000,000. This simple illustration emphasizes the devastation of losses and why we need to give extraordinary attention to avoiding them.
Warren Buffet’s number one rule of investing is “Lose No Money.” Between Einstein and Buffet – perhaps we need to pay at least as much attention to protecting our money – as we do growing our money.
