Rule of 20

Quick Reference

Regola pratica per convertire costi one-time in costi annuali equivalenti per decisioni di investimento.

Formula

Annual Cost Equivalent = One-Time Cost / 20

Logica

Assumendo: - Holding period: 30 anni - Discount rate: 3% - Present value annuity factor ≈ 20

Un costo di $1 oggi ≈ $0.05 annuo per 30 anni (in valore presente).

Derivazione

Present value of annuity:

PV = Annual Payment × [(1 - (1+r)^-n) / r]

Con r = 3%, n = 30:

PV = Annual × [(1 - 1.03^-30) / 0.03]
   = Annual × 19.6
   ≈ Annual × 20

Applicazioni Pratiche

Initial Fund Fee

Setup fee: $1,000

Annual equivalent:

Annual Cost = $1,000 / 20 = $50 per year

Confronta con: Annual management fee.

Se management fee < $50/anno, preferibile a setup fee.

Platform Charges

Platform A: - No setup - 0.5% annual fee

Platform B: - $2,000 setup - 0.3% annual fee

On $100k portfolio:

Platform A: $500/anno Platform B: $2,000/20 + $300 = $100 + $300 = $400/anno

Platform B cheaper se mantieni 30 anni!

Total Cost Calculation

Total Annual Cost = (One-time / 20) + Annual Holding Cost

Esempio complete: - Initial investment: $100,000 - Setup fee: $1,000 - Annual management: 0.5% = $500 - Annual platform: $100

Total = ($1,000/20) + $500 + $100
      = $50 + $500 + $100
      = $650 per year
      = 0.65% of portfolio

Broker Comparison

Broker A

  • No initial fees
  • Commission: $10/trade
  • Expected trades: 20/year
  • Annual cost: $200

Broker B

  • Setup: $500
  • Commission: $5/trade
  • Expected trades: 20/year
  • Annual equivalent: $500/20 + $100 = $125

Broker B wins (if 30-year horizon).

Sensitivity to Horizon

10-Year Horizon

Multiplier ≈ 8.5

Annual = One-time / 8.5

20-Year Horizon

Multiplier ≈ 15

Annual = One-time / 15

30-Year Horizon (Standard)

Multiplier ≈ 20

Annual = One-time / 20

Shorter horizon → setup fees più costosi in termini annuali.

Discount Rate Sensitivity

2% Discount

Multiplier ≈ 22.4

3% Discount (Standard)

Multiplier ≈ 19.6 ≈ 20

4% Discount

Multiplier ≈ 17.3

Higher discount → lower multiplier → setup fees più costosi.

Portfolio Rebalancing Costs

Transaction cost to rebalance:

One-time cost: 0.5% of portfolio Annual equivalent: 0.5% / 20 = 0.025% per year

Compare to: Management fee savings from rebalancing.

Tax Considerations

One-time tax (capital gains):

Realizing $10k gain, 20% tax = $2k tax

Annual equivalent: $2,000 / 20 = $100/year

Worth it? Se saves >$100/year in other costs.

Rule of Thumb Adjustments

Conservative (Short Horizon)

Use Rule of 15:

Annual = One-time / 15

More conservative, suitable se uncertain about holding period.

Aggressive (Long Horizon)

Use Rule of 25:

Annual = One-time / 25

Less conservative, suitable se very confident in 30+ year hold.

Combining with Other Costs

Complete Cost Framework

Total Annual = Setup/20 + Annual Fee + (Transactions × Turnover)

All in same units (annual %) for comparison.

When Rule Doesn't Apply

Not suitable for: - Very short horizons (<5 years) - Uncertain holding periods - High discount rates (>5%) - Costs that scale with portfolio

Use for: - Long-term investment decisions - Platform/broker selection - Fund initial charges

Practical Example: Fund Selection

Fund A (Active)

  • Initial charge: 5% = $5,000 on $100k
  • Annual fee: 1.5%
  • Annual: $5,000/20 + $1,500 = $250 + $1,500 = $1,750

Fund B (Passive)

  • No initial charge
  • Annual fee: 0.2%
  • Annual: $0 + $200 = $200

Fund B saves $1,550/year!

Over 30 years: $1,550 × 30 = $46,500 savings (without compounding).

Decision Matrix

One-Time Cost Annual Equivalent Acceptable If
$500 $25/yr Saves >$25/yr ongoing
$1,000 $50/yr Saves >$50/yr ongoing
$2,000 $100/yr Saves >$100/yr ongoing
$5,000 $250/yr Saves >$250/yr ongoing

Errori Comuni

  • Ignoring one-time costs: "It's just once!" (but amortized = expensive)
  • Wrong horizon: Using 20 for 5-year investment
  • Not including all costs: Missing platform/custody fees
  • Comparing unlike: One-time vs annual without conversion
  • Forgetting compounding: Rule gives simple annual, reality compounds

Concetti Correlati

  • [[Transaction Costs]] - costs this rule helps evaluate
  • [[Risk Adjusted Costs]] - framework per cost evaluation
  • [[Portfolio Construction]] - uses rule for platform selection