How Many Doubles Do Your Assets Need?
In writing this article I decided to do most of the explaining through what I would call some smart looking graphs and tables. It is the holiday season so who wants to do a bunch of math right? This article stems from a conversation ZEGA Co-Founder Jay Pestrichelli and I recently had around how advisors can help their clients out by designing portfolios that look to deliver what they need. Especially those ten or twenty years away from retirement or newly retired. Too often both advisors and their clients might become too worried about whether they are beating the overall market with returns. Instead, wouldn’t it be more productive to focus on what they need in assets to produce the right type of income in retirement? Another way to look at what it will take to grow assets to a clients desired amount is to ask, “How Many Doubles Do You Need”?
Rule of 72
I said no math, right? Well, maybe just a tiny bit if that’s alright. One of the nice things with reinvesting profits within accounts is that returns compound onto one another. If you wanted to figure out how many years, it would take using the Rule of 72 you would divide the number 72 by the rate of annual total return. For example, if the return is 7.2% a year you would divide 72/7.2 to figure it would take 10 years to double an account. The higher the return, the less time to double. In the graph above we can see how many years it would take to double comparing a set of annual return results. That’s right, if returns are only 1% a year it would take over 70 years to double. A 10% annual return would see the account take only 7.2 years and so on. Below we’ve inserted a table that breaks down the numbers for you.
The title of this piece is “How Many Doubles Do You Need”? This is a good discussion to have with your clients in determining what strategies are appropriate to grow assets that can in fact provide the base to draw income from later in retirement. Some may not have to try and beat the markets. Others might need to grab more than standard equity returns. Off course at ZEGA we have strategies for the whole spectrum of needs.
Below though in the graph you can get a sense for how many times assets will double depending on varied annual return levels over a twenty-year period. We also put in columns representing the 5-year annualized past returns from our own HIPOS Aggressive and Buy and Hedge Retirement strategies. Off course as always past performance does not equal future results, but thought it might be interesting to plug in those two just to gauge where they fell in the spectrum.
Since we added the table with the numbers in the previous example we will follow suit below.
One important point to end with is that many people assume that when investors assets double, say three times, they leave out the compounding mechanism. For example, say you start with $500,000 in an account. Some might think that the first double goes to $1M, then $1.5M, and $2M. But, that leaves out the power of compounded returns. Instead assets go to $1M, then $2M, and finally $4M. So, assets that double 3 times would actually result in 8 times the original amount.
To get a visual sense of how compounding at different return rates affects asset growth, consider the graph below which shows how an original $500,000 investment would grow assuming two different annual rates of return.
We can see that based upon an annual 10% return the original assets grew to over 6 times the initial amount. With the return slightly lower at 7.5% the assets grew just under 4 times the original level.
We know that many advisors who utilize the ZEGA strategies have meaningful conversations with their clients. They start with the end in mind and develop a plan to help their clients realize their goals. We felt like a simple reminder of how returns can play into those plans was helpful to review.