Why does the Rule of 69 work?

realized1031.com - What Is the Rule of 69 Percent In Real Estate Investing? - Realized 1031

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Investors love to employ rules to help them predict outcomes. For example, there is a one percent rule (a one percent increase in interest rates equates to ten percent less you can borrow to keep the same payment) and a two percent rule (the percentage of a home’s cost that you should be asking for in monthly rent) and more. Some of these rules can help estimate potential results, but others are outdated or possibly never really held much value.

What Is the 69 Percent Rule?

The Rule of 69 is a simple calculation to estimate the time needed for an investment to double if you know the interest rate and if the interest is compound. For example, if a real estate investor can earn twenty percent on an investment, they divide 69 by the 20 percent return and add 0.35 to the result. In this example, the double in value would require 3.8 years. For simplicity’s sake, many investors use the 72 rule instead because you can leave off the .35. Instead, you divide 72 by the rate of return. For example, if the return is ten percent, the Rule of 72 would suggest that the value of the investment will double in 7.2 years.

Do These Rules Make Sense?

These calculations provide a simple back-of-the-envelope formula to forecast doubling time if you invest in something with a fixed return. However, real life doesn't always follow simple recipes. For example, since the Rule of 69 percent relies on compounding, it may not be accurate. That’s because a lower appreciation early in the forecast period will continue to hold down the total gains by reducing the denominator. Here’s an example: Suppose that Joe buys a property and expects a 20 percent return. The Rule of 69 states that the investment would double in 3.8 years. However, if values drop initially, the investment needs to catch up before the compounding can start to increase the value, which will lengthen the timeline.

Appreciation Isn’t Guaranteed

Whether a real estate investment grows in value quickly, slowly, or not at all depends on factors not within the investor's control. Overall economic conditions like inflation and unemployment are significant, as are supply and demand. As with any investment, there is a risk that value will drop rather than increase. Investors should examine their risk tolerance and appetite when deciding whether to purchase a specific property. "Rules" can help as shortcuts for estimating possible growth but can't substitute for due diligence or guarantee outcomes.

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What is the most important rule for any investing?

Rule Number 1: Diversify Since some investments zig when others zag, divvy your money across several investment categories, from stocks to bonds to real estate. Also diversify within categories. Diversification spreads risk and guards against a catastrophic decline in any one investment.

kiplinger.com - 4 Golden Rules of Investing - Kiplinger

Whether you’re new to investing or a market veteran, these time-tested tips can help you build your fortune.

Rule Number 1: Diversify

Since some investments zig when others zag, divvy your money across several investment categories, from stocks to bonds to real estate. Also diversify within categories. Diversification spreads risk and guards against a catastrophic decline in any one investment.

Rule Number 2: Rebalance

Review your portfolio yearly to make sure your mix of investments hasn’t strayed from your original goals. If it has, sell investments that have performed well and use the proceeds to invest in underperformers to regain balance. Subscribe to Kiplinger’s Personal Finance Be a smarter, better informed investor. Save up to 74% Sign up for Kiplinger’s Free E-Newsletters Profit and prosper with the best of Kiplinger’s expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail. Profit and prosper with the best of Kiplinger’s expert advice - straight to your e-mail. Sign up

Rule Number 3: Dollar-cost average

Fear can cause investors to miss buying opportunities when prices are low. Euphoria can cause them to buy high. By investing the same amount in the same investments on a regular basis, dollar-cost averaging takes emotion out of the equation.

Rule Number 4: Keep costs down

You can’t control how much your investments earn, but you can control how much you pay to invest in them. Save by using an online discount broker, and stick with low-fee index funds and actively managed no-load funds.