Question

Let’s see how fees can hurt your investment strategy. Let’s assume that your mutual fund grows at an average rate of 5% per year—before subtracting the fees. Use the rule of 70 and round your answers to the nearest tenth of a year.
a. How many years will it take for your money to double if fees are 0.5% per year?
Doubling time:_______years.
b. How many years will it take for your money to double if fees are 1.5% per year (not uncommon in the mutual fund industry)?
Doubling time:________years.
c. How many years to double if fees are 2.5% per year?
Doubling time:_______years.

Answer 1

Answer:

We notice that the more the fees increase for a constant rate of return, the number of years it takes to double on the investment also increases. For example;

a). 15.6 years

b). 20 years

c). 28 years

Explanation:

The rule of 70 is a formula that can be used to estimate the number of years it will take an investment to double up.The formula is expressed as;

Number of years to double=70/Annual rate of return

a). Given;

Annual rate of return per unit of investment=5%

Annual fees per unit of investment=0.5%

Net rate of return=Annual rate of return-Annual fees=(5%-0.5%)=4.5%

Replacing;

Number of years to double=70/Net rate of return

=70/4.5=15.555 to nearest tenth=15.6 years

b). Given;

Annual rate of return per unit of investment=5%

Annual fees per unit of investment=1.5%

Net rate of return=Annual rate of return-Annual fees=(5%-1.5%)=3.5%

Replacing;

Number of years to double=70/Net rate of return

=70/3.5=20.0 to nearest tenth=20 years

c). Given

Annual rate of return per unit of investment=5%

Annual fees per unit of investment=2.5%

Net rate of return=Annual rate of return-Annual fees=(5%-2.5%)=2.5%

Replacing;

Number of years to double=70/Net rate of return

=70/2.5=28.0 to nearest tenth=28 years

We notice that the more the fees increase for a constant rate of return, the number of years it takes to double on the investment also increases