It's All About Math
By Dian Vujovich
A curious thing about making money in the financial arena, or any other one for that matter, is: if you don’t know how to add, subtract, multiply or divide you won’t ever really know if you’ve made or lost any money.
But math can be tricky. Even for those old enough to have had to memorize multiplication tables and figure out simple math equations in their heads. Of course, those would be the folks growing up around the time of Methuselah, i.e., before computers, calculators and hand-held devices took the place of people actually thinking and figuring out math-based stuff for themselves. Today cashiers at Publix and nearly every other store in America can’t even figure out how to make change. Machines do that for them. What a shame.
But leaving the math to machine calculations doesn’t do anyone any favors especially when it comes to investing. So to help you out, here are a few simple math-related tidbits everyone needs to know by heart:
•The Rule of 72. Want to know how long it will take for money you’ve invested to double in value? Divided 72 by the interest rate it’s earning. For example, if your investments are growing at say 8 percent a year, that $10,000 you’ve invested with grow to $20,000 in nine years.
Wonder how long it will take for that $20,000 to loose half of its buying power? Divide 72 by the rate of inflation. If that’s 3 percent, 20G’s will have the buying power of roughly $10,000 in 34 years.
Want to know the interest rate you’ll have to receive for money to double in 6 years? Divide 72 by 6. That means you’ll need a 12 per cent per year return for that to happen. Good luck with that one.
The Rule of 72 works because it’s based on annual compounding. A most wonderful thing.
Two kinda fun Web sites offering inflation calculation opportunities are http://data.bls.gov/cgi-bin/cpicalc.pl and http://www.usinflationcalculator.com.
• Market returns. A recent story in the WSJ.com included math examples too many of us forget (http://tinyurl.com/yenpsj6 ). Daniel Wiener, money manager and newsletter publisher is quoted saying: “When you suffer a very large loss, you need a gigantic gain to get back to where you started.”
And he’s right.
Wiener said that if your investment goes down 10 percent, it will take a gain of about 11 percent for you to get back to even (my math puts it closer to 12 percent); a 20 percent drop takes a 25 percent gain; a one-third fall requires a 50 percent gain (more like 51 percent according to me); and a 50 percent fall will take a 100 percent gain to get you back to even (right on).
Bottom line: It’s the simple math calculations that will make or break us.
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