What is Rule of 69
Rule of 69 is a general rule to estimate the time that is required to make the investment to be doubled, keeping the interest rate as a continuous compounding interest rate, i.e., the interest rate is compounding every moment. It does not provide the exact time but very close to proximity without using the pure mathematical formula.
Rule of 69 Formula
Type of Rules
Types of rules for calculating the no. of years take to make the investment double.
- Rule of 72Rule Of 72Rule of 72 is an estimated approach of calculating the time required to double the invested amount at a fixed interest rate. This is determined as a ratio of 72 to the annual interest rate. : It is used for the simple compound rate of interest.
- Rule of 70: It is used when the interest rate for the financial product is of a compoundingCompoundingCompounding is a method of investing in which the income generated by an investment is reinvested, and the new principal amount is increased by the amount of income reinvested. Depending on the time period of deposit, interest is added to the principal amount. nature, not of continuous compounding.
- Rule of 69: It is used when the interest rate is given is continuous compoundingContinuous CompoundingThe continuous compounding formula depicts the interest received when constant compounding is done for an infinite number of periods. The four variables used for its computation are the principal amount, time, interest rate and the number of the compounding period..
Examples of Rule of 69
Below are some of the examples of the rule of 69.
If an amount of $1 Mn is invested at the rate of 10%, then how much time will it take to make our investment to become $2Mn
Calculation of doubling periodCalculation Of Doubling PeriodThe doubling time formula measures the time taken by an investment to become twice its present value. Doubling Time = ln 2 / [n * ln (1 + r/n)]; where r is the rate of return and n is the number of compounding period per year. will be –
Doubling Period = 69/10
Doubling Period = 6.9 Years.
Consider the same example; if the ask was how much time it will take to become 8 Mn, then we consider simple find it as
|Initial Money||Rate of Int||At the End||Time|
The total time will be 27.6 Years.
If there is a security whose compounding rate of Int. is as follows, determine the time required to make if double.
Calculation of doubling period will be –
Benefits of Using Rule 69
The following are the benefits of the rule of 69.
- It assumes that the interest is continuously compounding. In fact, it is true to think in the case of equity valuationEquity ValuationEquity Value, also known as market capitalization, is the sum-total of the values the shareholders have made available for the business and can be calculated by multiplying the market value per share by the total number of shares outstanding. that is compounding on an instant basis.
- It provides the answer very close to the answer obtained by using a financial calculator.
- It is even considered as the thumb rule of the investment return generating a cycle.
- Easy to calculate the time required.
- Even the retail investorThe Retail InvestorA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making. or a non-finance person can easily determine the result.
- Can be used by any person without understanding the pure logic.
- Faster decision making and improve thought process.
Limitations of Using Rule 69
The following are the limitations of the rule of 69.
- Difficult to explain the logic behind the number 69.
- Rule 69 does not apply to everything. Only the security like equity, which is compounding every minute, can provide the exact value (Rule 72 can Be help in those cases)
- If the rate is too less like 2/3 % Per annum, than the result is not very accurate. Generally, the higher rate is well captured by this formula.
- Projects with a heavy investment need specially designed spreadsheets because a minuscule difference in time and rate of interest value can create a difference of millions.
- Difficult to absorb the value derived because of non-transparency of value derivation.
- This rule covers those instrument which compounds continuously like equity shares, but it ignores the dividend component which is also received by the equity holder, so overall the share did not increase by an exact multiple of 2, but the dividend amount makes the value of it.
- It is better to understand first that before applying rule 69, check whether the security or case on which we are applying the model is compound on a regular basis or have a different pattern.
- There is a category between 69 to 72 for the denominator part. As the continuous compounding decrease to become normal compounding, we shift from rule 69 to rule 72.
- It can be said that the time required to make the investment double is inversely proportionate to the interest rate, so if the interest rate is increased, then there will be less time required to make it double.
- It always needs to remember that the answer provides hereby is not the exact answer, so it needs to cover only the cases where the just a normal side by the figure requires not the exact time.
- It is used only for the financial items which are using the continuous compounding interestCompounding InterestCompound Interest is the interest earned from the initial Principal & the previously accumulated Interest amount. This is also known as “Interest on Interest” & it is always higher than the Simple Interest. rate as the compounding form, So not applicable generally on loan given by banks to the customer (Compound interest is applied in that case) or unsecured loan is given or taken from others. (Simple interest is applied).
- This formula works only in the condition where the interest rate does not change in between, i.e., a similar rate throughout the period; otherwise, the result can deviate from the result obtained using this rule.
- People are concerned with the investment horizonThe Investment HorizonThe term "investment horizon" refers to the amount of time an investor is expected to hold an investment portfolio or a security before selling it. Depending on the need for funds and risk appetite, the investor may invest for a few days or hours to a few years or decades. only if the amount involved herewith is huge in size. If required dedicated complexity calculative sheet to determine so not reliable for those projects, and even the little change in a variable can have a serious impact on deciding whether to do the project or not, so not worthy of using it.
This has been a guide to what is Rule of 69 and its meaning. Here we discuss formula to calculate the doubling period along with its examples, benefits, and limitations. You can learn more about accounting from the following articles –