Do you know the 72% rule? – 07/24/2023 – From Grain to Grain

Today, I spoke with a potential client who was disillusioned with investing. He had an amount close to R$500,000, but he was discouraged, as he had not seen his portfolio grow as he had hoped for over a decade. I’m sure the same must be true of most investors.

The dynamics of interest on interest is cruel. If you don’t understand it, you might give up right when you’re about to see the big transformation. I explain how the 72% rule can clarify this in a practical way.

I’m going to call the potential client I talked about Rafael just to give him a name. He received an amount of approximately R$ 125,000 about 14 years ago, as a result of a termination of employment.

Rafael thought that by investing the R$ 125,000, he would have more than R$ 1 million today. As he only reached R$500 thousand, he was discouraged and wanted to understand what to do. For him, 14 years was enough time to see his portfolio multiply.

I made an analogy yesterday about the delay in seeing the portfolio reach maturity with the cultivation of beans. If as a child, you also abandoned the beanstalk at about 30 days old, don’t worry, me and almost everyone abandoned the little plant.

However, the same cannot happen with your investments.

Understanding how a return of, say, 11% will transform your investment in the long run is very difficult for most people. However, there is a way to simplify this calculation with the 72% rule.

In the conversation, Rafael, too, confessed something that is not the most appropriate in financial planning. This failure took him away from his goal. But, I will explain it only at the end.

I told him: you will have R$4 million in 21 years. He didn’t believe it.

I agree that for someone who took 14 years to reach BRL 500,000, it seems an unrealistic statement. Especially when he said he was conservative and didn’t want to take risks.

However, the account is very simple.

I explained to him that his objective would be to try, at this moment, to invest only in CDBs within the FGC guarantee, with long maturities and looking for rates above IPCA+6% per annum.

Investing in CDB with a rate of IPCA+6% per annum or higher is currently very simple. The objective of investing in long terms is precisely to take advantage of this moment to lock in this higher rate for a longer period. Thus, the risk of not having this rate in the near future is reduced.

A CDB at IPCA+6% per year results in a return of 10.77% per year, considering an inflation of 4.5% per year.

The 72% rule provides an approximation of how long it takes for your investment to double in value.

If you divide 72% by the interest rate you earn on your investment, you find that period in which the investment doubles. Thus, dividing 72% by 10.77%, we find 6.68 years for the capital to be multiplied by 2.

The account is now simple. In 2030, that is, in 6.7 years, Rafael will have his dreamed R$ 1 million. Almost in 2037, it will reach R$ 2 million. Finally, before 2044, he will have R$4 million.

I know that R$ 4 million in 20 years is not the same value as today. But I’m sure if you have them in the future they will make a big difference to your retirement.

Realize that Rafael is closer to his goal today than he imagined. For him, it would take another 14 years for him to reach R$ 1 million, but in the same period he will have more than double.

However, Rafael could have reached R$500,000 even faster. He failed at one point, as I had mentioned. Now, I’ll tell you what the failure was.

He never made periodic contributions to his portfolio. If he starts to make monthly contributions, his goal will be reached early on.

Periodic contributions are like seeds that you plant. The more seeds you plant today, the more you will reap in the future.

Now calculate how long it will take you to reach your goal.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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