How long before your stocks double?

Q. I remember reading something that said stock market investments double approximately every seven years. It had to do with retirement savings projections. How can that be true?
— Investor

A. You’re talking about the “Rule of 72.”

The rule is an easy way to determine how long an investment will take to double based on its return, said Roy Williams, president and founder of Prestige Wealth Management in Flemington and Millburn.

“You divide the annual return by 72 to come up with a rough estimate of how long it takes for an investment to double,” Williams said. “It was long thought that the average investment return of the stock market was 10 percent, hence using the rule your investment would double in 7.2 years.”

Unfortunately, for those of you just beginning to invest today, this is likely an unrealistic expectation going forward, Williams said.

He said while the market did return 10.4 percent per year on average from 1900 to 2000, it only returned 1.07 percent from 2000 to 2010.

“Most economists expect our economy to grow at a moderate pace going forward at somewhere around 6 to 8 percent,” he said. “Taking a 6 percent return and applying this rule of 72 states that you’d double your money in 12 years.”

Williams said from this rule, it is easy to conclude that even small changes in rate of returncan have drastic changes in how quickly your money grows.

He said a financial planner can help you better understand how to project your savings and investments over time to ensure you have a realistic plan in place to reach your goals and objectives.

“Remember, the most important thing is to invest early and often as time can create wealth,” Williams said.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.