I'm a European resident (non U.S. Citizen), I receive my salary in USD. I have opened a USD account at my local bank to avoid exchange fees.

I'm having difficulties in finding a decent way to invest these USD. I would like to follow Graham's advice (25/75 to 75/25 between safe bonds and stocks). Especially, I find it difficult to make any money on safe bonds when the amounts invested are small and the commissions are (relatively speaking) high.

I have to pay minimum 14.95 USD (up to 0.15%) in commission when buying US stocks or ETFs. I do not have access to bonds in USD apart from via ETF.

It seems commission and spreads makes it impossible for me to invest in safe bonds.

For example, say I would invest 1000 USD in: iShares 1-3 Year Treasury Bond ETF

Broker gives me: spread 0.02%, commission: 14.95 USD. The management fees for the ETF is: 0.15%

Say I would hold it for 3 years, the last 3 years, the ETF increased by 0.65%:

That would give me less than 2 dollars! Given the commission of $14.95, I am actually loosing money on this.

(calculated as: 1000(1-0.0002)(1-0.0002)(1-0.0015)^(3)(1+0.0065), 0.0002 is the spread - buy and sell, 0.0015 is the management fee)

What would be some options that would be safe and yet give some protection for inflation?

  • Is my ETF calculation correct? or have I misunderstood it?
  • Is there any online broker for European citizens (non U.S. citizen) which would offer better options? (I have $20k USD to invest)
  • Should I exchange my USD to local currency (fee 0.15%) and buy national bonds instead? (I prefer not to, perhaps that is passive speculation, the USD is very low and I suppose that will change once the QE stops)
  • You invest in bonds for the interest payments (dividends paid to you by the fund), not for the capital appreciation... Graham suggests investing in bonds and holding. – littleadv Mar 28 '14 at 8:03
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    @littleadv, indeed: bloomberg.com/quote/SHY:US, 1000 USD today would be about 12 shares, it would take over 5 years to get back the 14.95 commission? (14.95/(0.0184/month * 12 shares) = 67months) Is that correct? – user14059 Mar 28 '14 at 8:42

Yes, you're absolutely right.

For such small amounts and such large fees, almost any investment choice is pointless.

Some brokers allow for commission free ETF trading. Seek them out.

As you've noticed, bond interest rates are almost 0%. This is a far cry from the days of Benjamin Graham, where the USD acted more like gold, with much more frequent booms and busts.

During Graham's heyday, one could sell one's bonds at super low interest rates and buy them back again when high. In his day, interest rates would be very high one year like in 2008 and next to nothing the next like in 2009, cycling back and forth, until the 1960s hit, and he didn't know what to do.

Graham preferred to wait for the reversion to the mean, and act only when far from it. Those opportunities are few and far between now since fiat currencies are far better managed than they were then, the Fed-caused 2009 total destruction as an outlier to recent times.

In your case, it's best to leave the bonds to the insurance companies and buy equities. If you want less volatility, buy a buy-write ETF. Bonds will surely disappoint unless one is lucky enough to hold bonds while interest rates fall from ~6% to ~3%, an eventuality that shouldn't be expected to occur again, as Bill Gross is painfully discovering.

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