1. The average stock market return since 1926 has been 11%. According to the rule of 72, how often will an individual investment double in that time?
2. What are investments? What is their purpose? What are examples of types of investments?
1. The rule of 72 states that if you divide the number 72 by a given interest rate, it will give you the approximate number of years it will take for your investment to double. In this case, since the average stock market return since 1926 has been 11%, you can divide 72 by 11 to find out how often an individual investment might double in that time. According to the rule of 72, an individual investment would double approximately every 6.55 years.
2. Investments refer to assets or items purchased in the hope of generating a profit or income in the future. Their primary purpose is to grow and preserve wealth over time. Examples of types of investments include:
- Stocks: Ownership shares in a company.
- Bonds: Fixed income securities where investors lend money to an issuer (e.g., government or corporation) for a fixed period, earning interest.
- Mutual Funds: Pools of money from multiple investors used to invest in diversified portfolios of stocks, bonds, or other securities.
- Real Estate: Investing in properties like residential, commercial, or industrial buildings with the expectation of earning rental income or capital appreciation.
- Commodities: Investing in physical goods like gold, oil, or agricultural products.
- Certificates of Deposit (CDs): Time deposits offered by banks with a fixed interest rate and maturity date.
- Exchange-Traded Funds (ETFs): Similar to mutual funds but traded like stocks on an exchange.
- Options: Financial contracts that give investors the right to buy (call option) or sell (put option) a specific asset at a predetermined price within a certain period.
- Cryptocurrencies: Digital or virtual currencies like Bitcoin or Ethereum that use cryptography for security.
These are just a few examples, and there are many other types of investments available to suit different goals and risk appetites.