Archive for Word Of The Week

Word Of The Week Rule of 72

 

Investopedia Definition

What is the ‘Rule Of 72’

The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return. The rule states that you divide the rate, expressed as a percentage, into 72:
Years required to double investment = 72 ÷ compound annual interest rate
Note that a compound annual return of 8% is plugged into this equation as 8, not 0.08, giving a result of 9 years (not 900).

BREAKING DOWN ‘Rule Of 72’

The rule of 72 is a useful shortcut, since the equations related to compound interest are too complicated for most people to do without a calculator. To find out exactly how long it would take to double an investment that returns 8% annually, one would have to use this equation:
T = ln(2)/ln(1.08)=9.006

Most people cannot do logarithmic functions in their heads, but they can do 72 ÷ 8 and get almost the same result. Conveniently, 72 is divisible by 2, 3, 4, 6, 8, 9, and 12, making the calculation even simpler.
The rule can also be used to find the amount of time it takes for money’s value to halve due to inflation. If inflation is 6%, then a given amount of money will be worth half as much in 72 ÷ 6 = 12 years. Nor does the unit have to be money: the rule could apply to population, for example.

 

Word Of The Week Management Expense Ratio

 

 

Investopedia Definition

What is the ‘Expense Ratio

The expense ratio is a measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund’s operating expenses are divided by the average dollar value of its assets under management (AUM). Operating expenses are taken out of a fund’s assets and lower the return to a fund’s investors. It is also known as the management expense ratio (MER).

BREAKING DOWN ‘Expense Ratio

Depending on the type of fund, operating expenses vary widely. The largest component of operating expenses is the fee paid to a fund’s investment manager or advisor. Other costs include recordkeeping, custodial services, taxes, legal expenses, and accounting and auditing fees. Expenses that are charged by the fund as reflected in the fund’s daily net asset value (NAV) and do not appear as a distinct charge to shareholders.

Components of an Expense Ratio

In addition to the management fees associated with a fund, some funds have a marketing cost referred to as a 12b-1 fee. This fee, if it exists, would also be included in operating expenses. A 12b-1 fee is charged by the fund to cover its distribution and marketing costs. A fund’s 12b-1 fee can be as high as 1% annually, with 0.75% going to distribution and marketing expenses and 0.25% going to service fees.
A fund’s trading activity, the buying and selling of portfolio securities, is not included in the calculation of the expense ratio. Costs associated with mutual funds but not included in operating expenses are loads, contingent deferred sales charges (CDSC) and redemption fees, which, if they apply, are paid directly by fund investors.