The Motley Fool
Ask the Fool
The Rule of 72
Q: Can you explain what the “Rule of 72” is? — G.L., Houston
A: It’s a way to quickly estimate how long it will take a sum to double: Divide 72 by your growth rate.
Let’s say you’ve invested in something that’s growing at 4% annually. Dividing 72 by 4 gets you 18 — meaning that it will take about 18 years to double your money. Earning 7% annually? Your money should double in about 10.3 years.
The rule works in reverse, too: If you’re aiming to double your cash in eight years, divide 72 by 8, and you’ll see that you’ll need a growth rate of about 9%.
It can even help account for inflation: If inflation is averaging 3% annually (as it has been, historically), divide 72 by 3, and you’ll see that prices are likely to double in about 24 years.
Q: How can I invest in wind-power stocks? — H.K., Boise, Idaho
A: You might look into manufacturers of turbines and wind-related products; General Electric and Vestas Wind Systems are two of the biggest, with Vestas being a pure play in wind and General Electric focusing on wind along with other kinds of energy. Energy companies such as NextEra Energy, Dominion Energy and Xcel Energy are worth consideration, too; in 2018, NextEra Energy generated more electricity from the wind and sun than any other company in the world.
There are also exchange-traded funds (ETFs) focused on wind energy, with assets spread across many wind-related companies. The First Trust Global Wind Energy ETF (FAN) is one example.
Be sure that you’re not invested only in wind stocks or only in energy companies. Diversify your holdings across a range of industries.
Fees and Costs of
Mutual fund fees have been falling in recent years, but they can still cost you a lot if you’re not paying attention. Fees in 2018 averaged $48 per $10,000 invested, down from $93 in 2000, per a Morningstar report — but mutual fund companies are still raking in tens of billions of dollars in fees annually.
You can pay a lot less in fees by parking your long-term dollars in broad-market stock index funds, such as those tracking the S&P 500 index of major American companies. Index funds are passively managed: Their managers simply invest in the same securities as the index they track; they aren’t busy studying companies to decide which to buy or sell. Thus, it’s not surprising that the average fee charged for passive funds in 2018 was only $15 per $10,000 invested — and with some companies, it’s much lower. Vanguard, for example, averaged just $9.
A mutual fund’s expense ratio, or annual fee, is clearly listed, but there are other costs to owning mutual funds. For example, if a fund’s managers are selling and buying various securities frequently, you’ll end up with short-term gains, which generally face higher tax rates than long-term gains; any commission costs for all that trading will be passed on to you.
EDITOR’S NOTE: The Motley Fool is an investment column created by brothers David and Tom Gardner and distributed by Andrews McMeel Syndication.