More Straight Talk on Investing

16Stupid Math Tricks for Smart Investors

If you are a fan of late-night talk shows, you may remember one of the staples of one program was “Stupid Pet Tricks,” in which pet owners would show off the antics of their animals. Believe it or not, there are quite a few “stupid math tricks” in investing. They're not really stupid at all, of course—just fun and useful to know, and to me, more interesting than a jump-roping dog. I'll devote this chapter to covering a handful of the math tricks of investing, which will help you to become a sharp-eyed buyer of financial products and services.

1. Dollars, not percent signs, are what you carry in your wallet. The investment management industry measures costs and performance in percentage terms. However, for practical decision-making, it can help to translate those percentages into dollars. For example, suppose you have a portfolio worth $100,000 with an average expense ratio of 1.00%. You may not mind paying 1%, but how do you feel about paying $1,000 per year? It's a more real-world way to assess the value you're receiving.
2. Make estimates in a flash with the Rule of 72. Want to know how fast your money will double? You don't need a calculator. Estimate your yearly rate of return and divide it into the number 72. The result is the number of years it will take for your investment to roughly double in value. The rule works with any amount of money.

   The Rule of 72 is a nifty trick, but it can do more for you than impress your friends. Suppose ...