You know, I don't like your original assumption that, as part of the free money we can get in this world for the good fortune of having been born, if you buy and hold an index you will make money.


As I said in another post, if you had bought at the 1930 low and held through today, you would hve made money. But the reason why the 1930 low was so low was specifically because nobody had the money to buy. At least not on this planet. maybe if you were from Mars, you could have had money on Earth when no one else did.


This goes along with what people call "international diversification." The theory is that if you spread your investments across two countries, the returns won't be correlated, so you can filter out country-specific risk and make free money. But the reality is THE ONLY REASON THEY AREN'T CORRELATED IS BECAUSE OF THE COSTS AND FRICTIONS ASSOCIATED WITH INVESTING IN FOREIGN COUNTRIES. If there is no geographic friction stopping the free flow of money and infromation between countries, their stock markets become PERFECTLY correlated. (Which of course brings up asymmetric friction, which is what I was talking about with stocks, where a Wall-St. analyst can't afford to build carboard boxes all day at 3Com but you can.)


In theory, the stock market should always rise to the level where people expect NO return over their investment time horizon. Why? Because people have no opportunity cost! If they have extra money now, and need mony for retirement, there is NONE of the opportunity cost which economists normally associate with "investment."


Somebody might have enough money now that he would rather have 1 apple in 10 years than 2 additional apples today. Meaning, the required return to get him to invest is NEGATIVE 50%. The more excess wages people have, the further into the future they are willing to accept a negative return, so the further against future expectations they discount the immediate stock price. If you have the money at the same time as everyone else, you will have to accept a negative rate of return at the same time as everyone else - while dot-com slackers fresh out of college drink free apple juice in the break room!


Anyway...


The "vig" is different for everyone, and it really isn't very big, compared to other factors.


loudmouth