Rule of 69 definition
/What is the Rule of 69?
The Rule of 69 is used to estimate the amount of time it will take for an investment to double, assuming continuously compounded interest. The calculation is to divide 69 by the rate of return for an investment and then add 0.35 to the result. Doing so yields an approximately correct estimate of the time period required. For example, an investor finds that he can earn a 20% return on a property investment, and wants to know how long it will take to double his money. The calculation is:
(69 ÷ 20) + 0.35 = 3.8 years to double his money
Using the Rule means that a prospective investment can be easily analyzed with a calculator, rather than needing an electronic spreadsheet for a more precise return calculation.
Disadvantages of the Rule of 69
While the Rule of 69 can be quite useful, there are also some problems associated with it, which are as follows:
Limited to continuous compounding. The Rule of 69 is specifically designed for investments that use continuous compounding, which is rare in real-world financial scenarios. Most investments compound interest annually, quarterly, or monthly rather than continuously. This limitation reduces the rule's practicality for estimating doubling time in typical investment settings.
Complexity compared to the Rule of 72. The Rule of 69 is more complex and less intuitive than the Rule of 72, which is simpler to apply for discrete compounding intervals. The need to understand and apply the concept of continuous compounding can be confusing for investors without a strong mathematical background. As a result, many prefer the Rule of 72 for its ease of use and similar accuracy for most practical purposes.
Less accurate for low or high interest rates. While the Rule of 69 is precise for continuous compounding, its accuracy diminishes at very low or very high interest rates. In such cases, the approximation can either overestimate or underestimate the actual doubling time, leading to misleading conclusions. This issue makes it less reliable compared to more detailed financial models.
Ignores real-world factors. The Rule of 69 does not account for taxes, fees, inflation, or other real-world factors that can affect investment growth. By focusing solely on the interest rate, it oversimplifies the complexities involved in long-term financial planning. This can result in overly optimistic estimates of how quickly investments will double.
Challenging for non-finance professionals. The concept of continuous compounding and the mathematical basis of the Rule of 69 can be difficult for individuals without a background in finance or mathematics to grasp. This complexity can discourage its use by everyday investors who may find simpler rules, like the Rule of 72, more accessible and understandable.
These disadvantages highlight why the Rule of 69, despite its accuracy for continuous compounding, is less commonly used in practice compared to other rules for estimating doubling time.
The Rule of 72
A variation on the concept is the Rule of 72, which is used for situations in which the rate of return is relatively low. The Rule of 72 becomes increasingly inaccurate when higher rates of return are incorporated into the calculation. Consequently, it is best to use a calculator or electronic spreadsheet to more precisely determine the doubling period for higher rates of return.