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