>>> [EMAIL PROTECTED] 07/14/02 14:19 PM >>> If I want to buy shares in the 500 or so companies on the S&P 500, I'll be looking at commissions of at least $3000, right
>>>That would be very low. I would guess that most people would pay roundtrip costs >with a presnet value of about $15 for holding 20 years with a cheap discounter. So >say $7,500 (unless I have a commissionless trading account, which requires a minimum balance of $500,000 or so)? If I hold those stocks for 20 years without ever rebalancing, that's $150/year. $150 divided by .2% is $75,000. >>> Assuming your portfolio is growing at about your discount rate that should be >about right. Except... What if I don't happen to have $75,000? Should I not invest in stocks at all until I've raised that much money just so I can save on commissions and fees? >>> You can get very close to the diversification of the S&P500 with a lot fewer than >500 stocks. Off hand I would guess that you can get over 95% of the variance >reduction with just 20 stocks. That would get the break even down below $5,000. If I buy 10 stocks and hold them for 20 years, I might pay less in commissions and management fees, but I'm much less diversified, right? >>> Not that much. Assuming constant variance and correlation the variance fraction of >the possible reduction you can get is inversely proportional to the number of stocks >you hold (you get half the reduction relative to holding one stock by holding 2 90% >by holding 10 etc). If correlation isn't constant then you should be able to do >better than that by choosing less correlated stocks. There is definitely a point at which mutual funds become less cost-effective than buying individual stocks, but I'm pretty certain you need to have at least $1 million dollars lying around in your stock portfolio for that to be true. >>>I very seriously doubt it is that much. - - Bill Dickens
