Calculating Your Wealth

Greek myth and Roman legend tell it, King Midas, who ruled over a large portion of present-day Turkey over a thousand years ago, had a thing about watching his money grow. 

He loved to count his gold coins, and he would even bathe in them. When it comes to investing, financial advisors, wealth management, and stocks and bonds, King Midas may have been the world’s first gold bug. 

The god Dionysus granted his wish for the Golden Touch, so that everything King Midas touched turned to his favorite asset: gold. 

Things ended badly when King Midas hugged his daughter, who turned to solid gold herself. Moral: greed bad.

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Watching It Grow

These days, watching your investments grow is more fun than ever—whether your wealth is in ETFs and mutual funds, stocks, government and corporate bonds, gold and other commodities, or more exotic instruments like bitcoin and other cryptocurrencies and NFTs. 

The calculator on this page can help you visualize just how much your money can grow.

Insert a given amount of money you want to invest—say, a new $25,000 bonus, or $1 million for the value of your entire portfolio.

Now type in the percentage “rate of return”—how much you want your money to grow each year, say 5% per annum or even 10%, if you are lucky. This is your “return on investment.”

Incredible fact: at a return of 10% per year, a million dollars turns into two million dollars in just seven years. 

Individual Stocks and Equity ETFs and Mutual Funds

In recent years, watching your stock investments grow is the most fun of all. 

If you invested $10,000 in the S&P 500 index of the five hundred largest publicly held companies at the start of 2011, it grew to almost $30,000 ten years later, at the start of 2021. 

And from January through October 2021, the S&P stock index is up another 26%.  So $10,000 grew to $36,400.

Gold, in the same ten-year period, gained less than 20% in value. King Midas would have been better off diversifying.

The roaring stock market, the longest and strongest bull run in history, is minting thousands of  new Midases. 

Trading apps like Robinhood and “cult stocks” like Gamestop and AMC have brought thousands of eager new investors into the stock market. 

Fidelity Investments is the world’s largest fund company. It offers retirement accounts, stocks, SEP-IRAs, 401(k)s, and thousands of mutual funds and ETFs, bonds, bond funds and more. 

At the start of 2010, Fidelity had 20,000 IRA accounts with more than $1 million.

By the start of 2020 that total had grown to 440,000 accounts. The ranks of new millionaires have multiplied by more than 20-fold in just ten years. 

Individual stocks have produced hundreds and thousands of new millionaires, from investors in Tesla to the “Dellioaires” who invested in Dell Computer in the late 1980s.

The Power of Compounding

That amazing increase in wealth and investing owes to something called the Power of Compounding.  It is why the rich do get richer.

And why a million dollars, invested at a return of 10% per year, can double to two million dollars in just seven years.

Einstein supposedly said mankind’s greatest invention was compound interest. In the late 18th century Ben Franklin explained compound interest this way:

“Money makes money. And the money that money makes, makes money.”

How It Works

Say you put $100,000 into an investment fund that earns a 10% annual return.  In Year 1 you collect an extra $10,000.

Now you have $110,000 to start Year 2—and 10% of that total is an extra $11,000. Now you are up to $121,000, and your upside in Year 3 is $12,100.

By Year 5 your original $100,000 investment is earning more than $14,000 for the year—a 40% higher annual return than the $10k you got in Year 1. 

In investment returns, a key measure is how long it will take to double your money on whatever asset you buy, whether in your investment portfolio of stocks and bonds and ETFs and mutual funds, or in your 401(k), IRA or SEP-IRA retirement account.

And how long it takes to double your money is illustrated by a simple equation:

The Rule of 72

You divide the number 72 by whatever percentage return you expect an investment to earn, and this yields how many years it will take for the investment to double your money.

Say you want your investments to grow at least 10% per year—how long will it take for you to double your money? 

72 divided by 10 = 7.2 years.  

Your money will double in seven years and two-and-a-half months. 

The actual investing returns you are able to earn will be determined by your asset allocation, and your mix of stocks, bonds, real estate, gold and silver and other precious metals, as well as hedge funds, private equity, private placements and other investments.

Higher Risk and Financial Advisors

The more risk you decide to take on, the more important it is to have a financial advisor or wealth manager to provide you with investment advice on diversifying the assets in your portfolio, hedging risk, investing in new stocks, startups and private equity ventures before the crowd gets there. 

Say you are considering investing in hedge funds with a higher level of risk to reap a higher level of returns: you target an investment promising 20% annual growth. 

72 divided by 20 = 3.6 years. 

At 20% per year, your money doubles in less than four years.  

A more cautious investor, willing to get only 5% a year on the investments in his or her portfolio, faces a vastly longer road to doubling. 

72 divided by 5 = 14.4 years.

At 5% growth per year, your money needs almost 15 years to double. Unacceptably long.

This Rule of 72 is a great way to assess an individual investment, too. 

Say you are considering buying Netflix company bonds that pay 5.875% interest per year. 

72 divided by 5.875 = 17 years.

Way too long—avoid them.

The best guideline, over all, is to aim for returns of 10% annually on all of your investing. Start doing it early in your 20s, and keep on adding to your 401(k) and IRA and your stock portfolio in your 30s, and by age 40 you can be a multimillionaire. 

With more to come. Wealth grows into even more wealth. 

Thanks to the Power of Compounding.

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