The Rule of 72

Q: Can you explain what the “Rule of 72” is?

A: It’s a way to quickly estimate how long it will take a sum to double: Divide 72 by your growth rate.

Let’s say you’ve invested in something that’s growing at 4% annually. Dividing 72 by 4 gets you 18 — meaning that it will take about 18 years to double your money. Earning 7% annually? Your money should double in about 10.3 years.

The rule works in reverse, too: If you’re aiming to double your cash in eight years, divide 72 by 8, and you’ll see that you’ll need a growth rate of about 9%.

It can even help account for inflation: If inflation is averaging 3% annually (as it has been, historically),  divide 72 by 3, and you’ll see that prices are likely to double in about 24 years.

wind energy

Q: How can I invest in wind-power stocks?

A: You might look into manufacturers of turbines and wind-related products; General Electric and Vestas Wind Systems are two of the biggest, with Vestas being a pure play in wind and General Electric focusing on wind along with other kinds of energy. Energy companies such as NextEra Energy, Dominion Energy and Xcel Energy are worth consideration, too; in 2018, NextEra Energy generated more electricity from the wind and sun than any other company in the world.

There are also exchange-traded funds (ETFs) focused on wind energy, with assets spread across many wind-related companies. The First Trust Global Wind Energy ETF (FAN) is one example.

Be sure that you’re not invested only in wind stocks or only in energy companies. Diversify your holdings across a range of industries.

My Dumbest Investment

Engagement-ring regrets

My dumbest investment? The first engagement ring I bought. It gave me a massively negative return on investment.

— C.C., online

The Fool responds: Yikes. People getting married often have some big expenses looming, such as the wedding itself, a honeymoon and perhaps a down payment on a home. Given that, it’s best to rein yourself in when buying a ring, lest you set yourself back financially or end up taking on costly debt.

Guidelines for how much you should spend vary widely. Not surprisingly, the jewelry industry often suggests spending at least two months’ salary on a ring. For someone earning $48,000, that would be $8,000! Most people aren’t following that guidance, though: According to the Knot’s 2019 Jewelry and Engagement Study, the average price paid for an engagement ring is $5,900, but a third of survey respondents reported spending between $1,000 and $3,000, and a tenth spent less than $1,000.

Ignore the “guidelines” and make your own decision based on your preferences and sensibilities. You may, for example, prioritize travel, education, a new home and/or savings over jewelry. Remember that there will also be wedding bands to buy, and those often cost $500 to $1,000 apiece.

Also, you might spend modestly on the engagement ring and consider it a starter ring; you can always upgrade to a fancier, pricier one later, when you’re more flush — perhaps for a big anniversary.

The Motley Fool Take

Creative earnings

Creative software specialist Adobe (Nasdaq: ADBE) has seen its stock quadruple in value over the past five years, with the company benefiting from many of the tail winds driving the economy. The rise of software as a service, the gig economy  and increased use of digital design, digital media and digital marketing are all reasons that the total addressable market is essentially unlimited for its products, which include Photoshop, Illustrator and Lightroom.

Adobe caters to the largest corporations, creative college students and everyone in between. It’s incredibly efficient as well, with operating margin at 28% and its relatively low debt of $4.1 billion almost entirely offset by over $3.6 billion in liquid assets. In the company’s recent third quarter, it reported record revenue of $2.83 billion, up 24% year over year, with net income rising 19%.

Seven years ago, CEO Shantanu Narayen repackaged Adobe’s products into an all-encompassing suite called Adobe Creative Cloud, now the industry standard for graphic design. Millions of subscribers pay $80 a month or $360 per year, and Adobe estimates that by 2022, its addressable market could rise to 45 million potential users.

Adobe shares may not be a screaming bargain today, but they still stand a good chance of rewarding long-term investors. At least keep them on your radar in case they drop in value. (The Motley Fool has recommended Adobe.)

Copyright 2019, The Motley Fool



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