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: