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Investing can often seem like navigating a sea of numbers and predictions, but some principles stand out for their simplicity and effectiveness. The 7-year rule is one of them — it shows how staying invested over time helps your money grow through compound returns. Think of it as a reminder that patience pays off in the long run.

What Is the Rule of 7 in Investing?

The rule of 7 provides a goal post for for buy-and-hold investors. Coined by Akash Majumdar, financial strategist at Money Uni, the rule recommends a seven-year investing horizon. This allows for growth amid the market’s ups and downs from one year to the next.

This rule is based on historical market performance and assumes that you reinvest gains to take advantage of compound growth. Although Majumdar lives and invests in India, the same principles hold true in the U.S. The S&P 500 has averaged 12.76% total returns over the past decade — even with down years like 2018 and 2022.

How Does the Rule of 7 Work?

An example makes it easier to understand how the rule of 7 works in action.

• Imagine you bought a share of Coca-Cola stock in February 2018, when shares were selling for about $43.
• Over the next two years, your stock would’ve risen fairly steadily, to about $58 by January 2020, before plummeting to about $44 two months later.
• That drop would’ve wiped out $14 of your $15 gains, leaving you about where you started.
• But by December 2021, your stock would’ve rebounded to $59, and by January 2025 would’ve been worth $70.
• As of mid-February, shares have dropped a couple of dollars, but analysts expect them to reach nearly $74 by February 2026.

Holding the stock would’ve provided an additional benefit. Coca-Cola returns some of its profits to investors by paying dividends. The current annual dividend amounts to 2.82% of the share price. The company has also increased the amount every single year for the last 62 years — including in years when shares were down. Reinvesting the dividend into more shares would’ve compounded your gains.

The rule serves as a reminder to investors that patience and time are key elements in growing their investments.

Step-by-Step Guide To Using the Rule of 7

Use the rule of 7 to your advantage by investing strategically. Here’s how.

Step 1: Determine Your Investment Amount

Investing is risky, so make sure you’re on track with more immediate goals before you start.

First, create an emergency fund if you don’t already have one. If you’ve started a fund, consider bulking it up enough to cover at least three to six months of living expenses.

Also, look at credit card debt. The average credit card has an annual percentage rate nearly twice as high as the annualized returns of the S&P 500. That means paying off your cards could return twice as much gain on your investments as you might expect from stock investments — with no risk.

Once you’ve met those goals or are making good headway, review your budget to see how much you can commit each month to long-term investments.

Step 2: Choose Your Investments

Keeping in mind that high-growth investments tend to be the riskiest, choose investments that suit your investing goals and your risk tolerance. Possible choices include:

• Individual stocks
• Mutual funds
• Exchange-traded funds
• Real estate investment trusts
• Bonds
• Precious metals
• Cash — money market fund, certificates of deposit or high-yield savings account

Step 3: Reinvest Your Earnings

Investments that earn interest or dividends can supercharge your portfolio’s growth. Putting that money toward assets compounds growth by increasing the amount of principal to which the growth applies.

Here’s an example:

• Say you invest $100 in a REIT.
• This REIT pays dividends averaging 5% per year, which you reinvest in the REIT.
• Fast-forward one year — instead of having $100 invested, you now have $105.
• In the second year, you’ll earn that 5% on $105 instead of on just the original $100.

Step 4: Stay Invested for at Least 7 Years

Investments might fluctuate in value, but resist the urge to panic-sell. By holding investments for the long term, you give yourself time to ride out market corrections and go on to earn profits.

One way to reduce volatility risk is by dollar-cost averaging.

• With dollar-cost averaging, you invest smaller amounts on a regular basis, such as monthly or quarterly, instead of in large lump sums.
• You’ll buy some shares at higher prices and some at lower prices.
• Over time, you’ll have purchased more shares at lower prices than you purchased at higher ones.
• This strategy uses downturns to your advantage, to reduce the overall average price you pay per share.

Step 5: Adjust for Market Conditions

Different assets grow at different rates. Over time, this can throw off your portfolio’s balance.

• Say, for example, you started with 50% of your portfolio in stocks and 25% each in REITs and bonds.
• If stocks have grown faster than REITs and bonds, you might find that 60% of your portfolio is now in stocks.
• You can rebalance your portfolio to restore the original mix.

However, you might decide that your risk tolerance has changed, or that changes in the market have left you wanting to make changes in your portfolio. Perhaps you have investments that are underperforming and are unlikely to bounce back. The rule of 7 isn’t so hard fast that you can’t shift money from one asset to another, or sell a loser.

Comparing the Rule of 7 to Other Investment Principles

The rule of 7 is a buy-and-hold strategy, but it’s not the only strategy investors employ.

Rule of 7 vs. Market-Timing

Whereas the rule of 7 calls for investors to largely ignore market fluctuations, market timing involves basing buying and selling decisions on them. The goal is to buy securities when the prices are at their lowest and sell them at their peaks.

One challenge of this strategy is the steep learning curve — you’ll need to learn technical and fundamental analysis techniques. It’s also time-consuming because you have to watch your investments carefully for unexpected movements.

The Power of Long-Term Investing

As the saying goes, time in the market beats timing the market. Although market timing has the potential to earn large returns, in practice, it’s a speculative way to invest. In fact, the investment firm Franklin Templeton likens it to trying to predict the weather.

Investing for the long term, on the other hand, lessens the effects of volatility. And when your investments earn dividends, reinvesting them compounds your portfolio’s growth with no additional risk.

Real-World Example of the Rule of 7 in Action

To get a better sense of the power of the rule of 7, consider the following example.

A Long-Term Investment Portfolio

Nowhere is the value of long-term investing more evident than with retirement savings. Fidelity publishes a retirement guide with an example that illustrates how much impact time in the market has on compound gains.

• A 25-year-old who starts saving $5,500 of pre-tax income each year will have $950,000 at age 67, assuming a modest return of 5.50%.
• Delaying saving for 10 years, to age 35, reduces the amount invested by $55,000, but it costs the investor $440,000 in gains.
• If the investor delays another five years, until age 40, they’ll invest $82,000 less than if they’d started at age 25.
• That $82,500 will cost them $580,000 in growth, leaving them with just $370,000 at age 67.