Sometimes it just isn't that complicated. In a recent meeting one of our advisors, Rich Roscelli, reminded me of the Rule of 72. It made me smile and took me back to my early days at Merrill Lynch when I first heard of the term. It's simple. Just divide the number 72 by the annual return of an asset class and you'll come up with the number of years it takes to double your money:
In other words, 72 divided by a return of 10 percent (don't include the % in your division) equals 7.2 years to double your money. Yes, the logarithmic calculation is a little more complicated, but you get the idea.
It was rumored for years that Albert Einstein was the author of the quote "Compound interest is the 8th Wonder of the World" and came up with the Rule of 72 as a quick formula but after digging through countless articles and Google searches it seems this is little more than folklore. There does appear to be conclusive proof, however, that he did say "the hardest thing to understand is income taxes," but I'll leave that for my next article.
The world holds approximately $27 trillion in U.S. debt, so it is a good place to start our analysis. Let's see what kind of return you get and how long it would take to double your money.
A 30-year piece of paper yields 1.64% and would take you just shy of 44 years to double your investment. How about the benchmark 10-year? Whoops! At just 0.89%, it would take almost 81 years. It gets worse. 5-year treasuries would take 180 years and if you rolled 1-year T-Bills at 12 basis points it would take a whopping 600 years to double your money.
Corporates offer more. The current BBB investment grade curve shows a 10-year gets almost 2.8%. Wow, our rule of 72 says you can double funds in just 26 years.
What about Gold?
In the last 20 years, gold has been a fantastic vehicle for wealth creation. It does not have a yield, but you would have doubled your money 6 times over. Of course, today's price is just under where it stood in 2011. Nine years is a long time go without a return and with no dividend or interest rate payment to help pay the bills it's for hard core believers of the yellow metal.
In this context suddenly stocks don't look all that expensive and, while they're not the only game in town, they're certainly in position to see a lot of fund flows as, step by step, America goes back to work. As I said last week the vaccine is a game changer and estimate revisions, the Holy Grail of securities analysis, will continue to move higher for most industries.
Think of it this way. Assets compete for your dollars just like everything else. It is a combination of total return and the risks you took along the way. In the last 40 years, the S&P 500 has averaged 8.5% annually since November 1980. Our rule of 72 puts stocks at an attractive 8.4 years to double your money, and that's not counting dividends. Add the 1.6% available today and the picture gets a whole lot brighter.
The above doesn't suggest that the next 40 years will look anything like the last 40. We have gigantic deficit and a Fed balance sheet measured in trillions of dollars. Moreover, every corner of the world is still a geopolitical nightmare. Add the fact we live in a nation that's ideologically divided, and stock returns could easily fall below that ambitious outlook.
Until there is competition for your investment dollars, however, stocks still look like the better asset class.
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David Nelson is Co-Chief Investment Officer and Chief Strategist for Belpointe Asset Management.
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Equities Contributor: David Nelson, CFA CMT
Source: Equities News
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