Now you know that, thanks to compound interest and the Rule of 72, you can double your money in ten years with just seven percent interest. So, where can you safely earn seven percent interest? Let’s look at the average earnings for investments.
Invest in the Stock Market
If you wanted to double your money in 10 years through seven percent compound interest, the U.S. stock market seems like a good choice.
Explain stocks as a small part of owning the company. You get to enjoy the profits of ownership and vote on decisions, but you also get to suffer the loses
For nearly 90 years, since 1928, the U.S. stock market has averaged 11.53 percent interest. You can see a table of historical investment results for yourself. This table uses the Standard & Poor’s index of 500 stocks, the S&P 500, to represent the overall stock market.
When you average the S&P 500 column in the table, you get 11.53%. That’s an amazing performance for nearly a century. Unfortunately, you need to think in decades, not centuries.
I calculated the average for every consecutive ten-year period in the table. There are 80 such time periods. Using this moving average makes a much smoother, and more useful, chart compared to the annual results:
Looking at this chart, you can see that for the vast majority of ten-year time periods, the stock market gives you more than seven percent average annual interest. In fact, 65 of the 80 ten-year time periods have average returns of seven percent or higher. The highest period yielded 20.7%. That was the post-war boom of 1949 to 1959.
Yes, there are 15 of the 80 ten-year periods with average returns of less than 7 percent. The worst is 2.4% That was the decade 2000-2010: the bursting of the dot-com bubble, the 9/11 terrorist attacks, and the Great Recession, all in one decade. Remember that? Ouch.
Still, among all the average earnings for investments, the U.S. stock market is the most reliable place to double your money in ten years through compound interest.
What about Treasury Bonds and Bills?
The charts above, and the table on which they are based, include data for U.S. Treasury bonds and bills. Bonds and bills are ways that the U.S. government borrows money.
Bonds are long-term loans to the government. The data I’m using includes 10-year bonds. This means that you can loan the government money for ten years, and they’ll pay you back with interest. Think of this as kind of like a home loan.
Bills are short-term loans to the government. The data I’m using includes 3-month bills. This means that you can loan the government money for three months, and they’ll pay you back with interest. Think of this as kind of like a credit card.
Loaning the government money is considered safer than investing in stocks. There’s a contract, just like with your home loan and credit card. You can expect a specified interest rate, written down on paper. The trade-off for this guarantee is lower rates of returns.
Bills have only 12 ten-year periods out of 80 where they return more than seven percent interest. The average ten-year period for bills earned 3.7 percent a year. With the Rule of 72, you’d need nearly 20 years to double your money. The best 10-year period is 8.94 percent.
Bonds have only 20 ten-year periods where they return greater than seven percent interest. The average ten year period for bonds earned 5.4 percent a year. With the Rule of 72, you’d need a little more than 13 years to double your money. The best 10-year period is 13.75 percent.
(Image courtesy of Wikimedia)