When you are looking to start investing, an easy way to visualize how much money you can make is to find out how long it takes to double your money. Mutual funds are an increasingly popular type of investment, and it is often said that they will double your money in seven years. Is that true?
Mutual funds double every seven years based on their average return. Using the Rule of 72, an investment will double every seven years when the rate of return is approximately 10.28%, and this happens since the return on most mutual funds is greater than 10.28% based on the total market average.
This article will explain how the Rule of 72 works, how you can use it to determine the number of years or the rate of return you need to double an investment, and why most mutual funds double in seven years.
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Table of Contents
How Long Will It Take To Double Your Investment?
If you are looking for an investment that will double your money in a certain amount of time, there is an easy way to determine which ones will and which ones will not.
This method works for investments that are longer than a few years and does not apply to short-term investments since returns can fluctuate in a short period, and for investments to meet their estimated return, they need a few years to bounce back from losses.
To determine how long it will take to double your investments, you can use the Rule of 72. This Rule is simple to use as long as you know the rate of return on investment. All you need to do is divide 72 by the rate of return as a percentage, and the result will tell you how long it will take to double your investment in years.
You can also use the Rule of 72 to find an investment that will double your money in a certain amount of time.
For example, say you have an investment that you need to double in eight years or less. You can divide 72 by eight years to get 9%. So, you will need to find an investment with a return of nine percent or higher to double your investment in eight years.
Remember that this equation is only an estimate of how long it will take to double your investment. The actual duration depends on the actual return that your investment makes. The equation only uses an estimate, so in reality, it may take more or less for your money to become twice as much.
Why Do Mutual Funds Double Every 7 Years?
Using the Rule of 72, mutual funds will double every seven years with a rate of return equal to 10.28%.
This rate may seem high, but mutual funds have historically had a higher average return. Since 1928, the historical return on the S&P market has been 11.64%.
Mutual funds are large investment funds that use money from many investors to invest in a large variety of stocks. So, the average return of the S&P is a good indicator of how mutual funds are performing too.
According to The Balance, the average return of small, mid, and large stock mutual funds over the past five years has exceeded 10.28%. Therefore, mutual funds with a majority of stocks will mirror the total index’s rate of return, and as long as it is over 10.28%, your investment will be worth twice as much in seven years.
Note that bond-focused mutual funds have lower returns than stock-based mutual funds because bonds are less risky, and the lower the risk, the lower the return.
Naturally, if you are looking for a safe investment, in mutual funds or otherwise, the time required to double your return will be higher.
Remember that mutual funds are not guaranteed to double in seven years. The amount of time can be higher or lower than seven years, but seven years is the average.
What Mutual Funds Might Not Double in Seven Years?
There are many reasons why mutual funds may not double as fast as you expected.
The first reason might be the overall market conditions. If the market is growing slower than expected, your mutual funds will be no exception. Recessions, political events, or even global pandemics can significantly slow down markets.
Another reason could be that your mutual fund manager is not managing the fund well. You can get details on a mutual fund from your brokerage. If your broker sells stocks when they drop in price or are only buying stocks after they become popular, you’re unlikely to get high returns from your investment. It may be worth looking for a new fund if you believe this is the case.
Additionally, mutual funds almost always have a mix of stocks and bonds. As mentioned above, bonds have lower returns than stocks, so a bond-heavy mutual fund will have lower returns over a long period than a stock-heavy mutual fund.
While bonds are a safer investment, stocks are better for long-term investments since they can grow high enough to cover any losses.
Finally, inflation is a reason that your mutual funds may not double in seven years. Stocks have historically performed better when there is low inflation, and worse when inflation is high.
High inflation negatively affects stocks and therefore mutual funds because it slows down the economy, decreases how often people are spending money, and therefore, companies’ stock prices decrease. Similar to above, a stock-heavy mutual fund may not perform as well as expected if inflation is high.
Mutual Fund Resources
To choose a mutual fund that will double your investment, you need to learn how these investment vehicles work. These books from Amazon.com are great resources for anyone looking to invest in mutual funds:
- Guide to Investing in Stocks, Bonds, ETFs, and Mutual Funds: This book will give you an overview of all different types of investments so that you can decide which ones are right for your financial goals. You will be able to compare other types of investments to mutual funds and understand the benefits of mutual funds.
- The Everything Guide to Investing in Your 20s & 30s: This book is great for young people looking to invest in mutual funds. Since mutual funds are good as a long-term investment, having time to let your money grow is crucial. You can learn how to start investing, how investing will get you ready for retirement, and why now is the best time to start investing.
- Mutual Funds for Dummies: This is the best book for beginners to both mutual funds and investing in general. It contains strategies, tips, mistakes to avoid, and more to help you begin smartly investing in mutual funds. There are also examples of sample portfolios and steps you can take to get started with mutual funds.
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Conclusion
According to the Rule of 72, investments will double in seven years if they have a return rate of at least 10.28%. Since mutual funds often have an average return greater than 10.28% for five-year funds, they are very likely to double in seven years or less.
Use the market average to compare how mutual funds will grow over time and predict how your mutual funds will grow. Remember that mutual funds are best as a long-term investment, especially when they have many stocks over bonds.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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