If your money grows at 10% per year, how many years before it doubles?
AI's response in regular print | Beverly Hills, CFP®, Joe O'Boyle's in italics
OpenAI’s ChatGPT tool responds to an investor question and Certified Financial Planner™ professional, Joe O’Boyle, fine tunes the AI response (in italics). This should be fun!
“If your money grows at 10% per year, how many years before it doubles?”
If your money is growing at a rate of 10% per year, it will take approximately 7.2 years for it to double. This is calculated using the rule of 72, which is a quick way to estimate how long it will take for an investment to double in value given a fixed annual rate of return.
To use the rule of 72, you divide the number 72 by the annual rate of return. For example, if your money is growing at a rate of 10% per year, you would divide 72 by 10, which gives you an answer of approximately 7.2 years. Keep in mind that this is just a rough estimate and the actual time it takes for your money to double will depend on a variety of factors such as inflation and any fees or taxes that may be applied to your investment. It is also important to note that investments can go up or down in value, so there is no guarantee that your money will actually double in value within a specific time frame.
Let’s say you can earn a 6% annual rate of return on an investment. Using the rule of 72, you divide 72 by 6 (the annual rate of return), which gives you an answer of 12 years for your money to double. Imagine if you were 18 years old and invested $10,000 into an investment that is earning 6% per year. By age 30, your money would double to $20,000. By age 42, it would double again to $40,000. By age 54, it would double again to $80,000 and by age 66 those funds would double again to $160,000. A one time investment had grown by 16 times in value between age 18 and 66. This is the magic of time and compound returns.
”What is the stock market’s average annual rate of return?”
It is difficult to determine an average annual rate of return for the stock market as a whole, as it will depend on a variety of factors such as the specific stocks or indexes that you are looking at and the time period you are considering. However, over the long term, the stock market has historically had an average annual return of about 10% per year. This is based on the performance of the S&P 500 index, which is a broad measure of the stock market that includes 500 large publicly traded companies in the United States.
If you invested $100 in the benchmark S&P 500 stock index at the beginning of 1926, you would have about $1.05 million at the end of 2022 - assuming you reinvested all dividends. This is an average return of 10.04% per year and illustrates the power of long term investing and compound returns (over roughly the last 100 years).
Note: The S&P index returns start in 1926 when the index was first composed of 90 companies. The name of the index at that time was the Composite Index or S&P 90. In 1957, the index expanded to include 500 companies and was called the S&P 500. Today, the S&P 500 is one of the most popular U.S. stock market benchmarks because it tracks the performance of about 500 of the largest publicly listed U.S. companies which represent 80% of available U.S. market capitalization.
Keep in mind that this is just an average, and the actual return that you earn on your investments may be different depending on the specific stocks or funds you choose and the timing of your investments. It is also important to note that the stock market can be volatile and there are no guarantees of any particular rate of return. Investing in the stock market carries risks, and you should carefully consider your investment objectives, time horizon and risk tolerance before making any investment decisions.
In the short term, there is certainly downside risk when investing in the stock market - even when doing so in a broadly diversified stock market index. For example, the benchmark S&P 500 index was down over 19% in 2022. Over the last 2 decades, this was the S&P 500’s worst one year decline since it was down 37% in 2008 (great financial crisis) and/or down 22% in 2002 (in the wake of the dot-com bubble bursting). However, from a historical perspective, long term investors in the stock market understand that enduring periods of short term market declines has been the tradeoff for earning positive long-term annual returns and building wealth over time.
What did you think? How did AI do?
About OpenAI’s ChatGPT tool:
GPT (short for "Generative Pre-training Transformer") is a type of language model developed by OpenAI that is trained to generate human-like text. ChatGPT is specifically designed for generating text in a conversational style. It is a machine learning model and has been trained on large datasets of real-world conversations in order to learn the patterns and styles of human communication.
Joe O'Boyle is the founder and principal of O'Boyle Wealth Management, a full service financial planning and investment management firm, located in Beverly Hills, California. Joe O’Boyle was named to InvestmentNews 40 under 40 class of 2016, and has a catalog of financial planning and investing articles on Money.com & U.S. News. Disclosure information.