Monday, November 25, 2013

Rule of 72 in Reverse for Mutual Funds

Most people have heard of the Rule of 72. It’s a way to estimate how long it takes for your money to double at a given rate of return. Less well known is that this rule can be used to estimate how long it will take for investment fees to consume half your portfolio.

The Rule of 72 says that if your rate of return times the number of years you earn that return is 72, you’ll roughly double your money. So, if you earn 6% each year, it takes about 72/6=12 years to double your money.

When it comes to fees, the same rule works for finding the number of years it takes for fees to consume half of your money. For example, if you invest in Investors Canadian Growth Fund, the total fund costs each year are 3.02% of invested assets. So, it would take about 72/3.02=23.8 years for half your money to be consumed in costs. This rule just gives an estimate, but it’s pretty close. The actual time is just under 23 years.

Update 2018 Nov. 27:  This fund's total expenses are now 2.72% per year.  The time required for expenses to consume half your money is now 25.5 years.

1. brutal. Investment advisors will not like you :)

1. @AnatoliN: I think that ship has already sailed :-) There are some advisors who like me, but they're in the minority.

2. Cool!
I have a friend who is working selling mutual funds etc. She makes a very nice living but it's very stressful. Not only do you have to deal with customers who realize what you've just painfully illustrated, but she is also always getting yelled at by her company for not selling enough and for not selling enough of the high return to the company offerings. Like any sales job it takes a certain personality to do the work.

1. @Bet Crooks: Many years ago a friend of mine was desperate for work and started selling segregated funds for an insurance company. He eventually found different work because he couldn't stomach what he had to do to make a living.