Investing basics: The Rule of 72 and fixed income mechanics

Investors can use the ‘Rule of 72’ as a quick mental shortcut to estimate how long it will take for an investment to double in value. By dividing 72 by the annual interest rate, one can approximate the number of years required for the principal to double. This method is particularly effective for interest rates between 6% and 10%.

For those starting with fixed income, understanding the different types of assets is essential. Fixed income involves lending money to banks, companies, or the government in exchange for a return. These investments generally fall into three categories: pre-fixed (rate is known at the start), post-fixed (returns follow an indicator like Selic or CDI), and hybrid (a fixed rate plus inflation adjustment).

Key considerations for fixed income include credit risk, which depends on the financial health of the issuer, and the power of compound interest, where earnings from one period are reinvested to generate further returns in subsequent periods.