Mutual funds: The Rule of 40

Mercer actuary Malcolm Hamilton explains just how quickly MERs can eat into your investment using the Rule of 40.



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While most investors may be familiar with the Rule of 72 to determine how long it takes to double your money (divide 72 by the expected investment return), the Rule of 40 may be less familiar.

The Rule of 40 is important for mutual fund investors. I first came across it when I asked Mercer actuary Malcolm Hamilton to write a foreword for my 1998 book: The Wealthy Boomer: Life After Mutual Funds.

As he explained in the book, a mutual fund investor can take the number 40, divide it by your mutual fund’s Management Expense Ratio (MER), and the result is the number of years it takes management expenses to consume a third of your investment. So if you have a 2.1% MER (the Canadian average at the time), 40 divided by 2.1 gives you about 20 years for a third of your investment to be lost to fees.

In the accompanying audio podcast, the same Malcolm Hamilton recaps the Rule of 40 as it affects investors in the year 2012:

      Mutual-funds-the-rule-of-40.mp3|titles=Mutual funds the rule of 40

3 comments on “Mutual funds: The Rule of 40

  1. this is such a lame topic and i keep hearing people talk about it.
    listen, if you're going to invest, there are going to be fees involved, professional money managers need to get paid. just like your real estate agent needs to get paid. yes, beware of high MERs, but there are decent MER mutual funds out there that have made investors good money. if are not a millionaire and are someone who is starting out as an investor, you should invest in a good quality mutual fund and yes, the management team and your advisor – all of these are working on your behalf – they need to get paid. so, let's be careful when we post articles like this one – 0% fees mutual funds are utopic, etfs are not free either.


  2. etf's are the way to go!!!

    thanks Vanguard !!!!


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