Welcome to the Investors Trading Academy talking
glossary of financial terms and events. Our word of the day is “Rule of 70”
The Rule-of-70 provides a simple way to calculate the approximate number of years it takes for
the level of a variable growing at a constant rate to double. The rule of 70 states that
in order to estimate the number of years for a variable to double, take the number 70 and
divide it by the growth rate of the variable. This rule is commonly used with an annual
compound interest rate to quickly determine how long it would take to double your money.
An Asset grows exponentially when its increase is proportional to what is already there.
A common example is compound interest, where $100 invested at 7% per year annual compound
interest will double in 10 years! Exponential growth applies to populations, too — if a
population grows at 7% per year, it, too, will double in 10 years.
There are surprising consequences to the phenomenon of exponential growth. The $100 invested at
a 7% annual return will double in 10 years to approximately $200, double in another 10
years to approximately $400, and double again in the next 10 years to approximately $800.
Significant gains can be made by simply relying on exponential growth over time. One way of
saying this is that the longer you wait on your investment, the faster your returns come
in. Another useful application of the rule of
70 is in the area of estimating how long it would take a country’s real GDP to double.
Similar to compound interest rates, one can use the GDP growth rate in the divisor of
the rule. For example, if the growth rate of the China is 10%, the rule of 70 predicts
it would take 7 years for China’s real GDP to double.