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.

1 answer

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: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 yearsb). 20 yearsc). 28 yearsExplanation: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 returna). 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 yearsb). 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 yearsc). GivenAnnual 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 yearsWe 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

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