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

a. How many years will it take for your money to double if fees are 0.5% per year?

According to the rule of 70

we divide 70 by annual growth rate

Annual growth= 5%-0.4%= 4.5%

Therefore=70/4.5

15.56 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)?

Annual growth= 5%-1.5%= 3.5%

70/3.5

20 years

c. How many years to double if fees are 2.5% per year?

Annual growth= 5%-2.5%= 2.5%

70/2.5

28 years