Investing small amounts for the medium term (Part 3 of 3)

Genevieve Signoret

Letter from the President

This is part three of a three-part series on how we’re coping with transaction costs on small transactions. We illustrate our approach by focusing on a situation we often face: a client has a large account but, within it, one small “bucket” (portfolio). We consider the case in which the client’s investment horizon for this bucket is medium-term.

In Part 1, I summarize the whole series. In Part 2, I explain why smaller portfolios require simpler strategies, regardless of whether the brokerage account is held in the USA or Mexico. In Part 3, I lay out our simplified strategy for the medium-term bucket.

Part 3: La Carpeta Negra Medium Term Simplified

For investors with medium-term horizons, large buckets, and U.S. brokerage houses[1], we use an individualized version of La Carpeta Negra Medium Term, currently allocated to U.S. small- and mid-cap stocks, the U.S. financial sector, U.S. and non-U.S. real estate, stocks in developed Europe and Pacific markets, and U.S. investment grade bonds, both corporate and Treasury. As I explained above, however, for small buckets, this strategy is overly complex.

To minimize outsized percentage transaction costs for small buckets invested for the medium term, we’ve devised a simplified version of LCN-MT we’re calling “La Carpeta Negra Medium Term Simplified.” Its allocation is as follows:

• 5% U.S. dollar cash;
• 57% an all-world stock index fund;
• 19% a U.S. investment grade corporate bond fund;
• 19% a U.S. Treasury bond fund with an average duration of 7–10 years.

This asset allocation differs from that of our standard medium-term model portfolio[2] (LCN-MT) in two ways: it allocates 5% to cash to ensure that we can buy on price dips without incurring excess fees by selling small numbers of shares, and the fact that it concentrates its entire equity allocation to a single world stock fund rather than spreading it out over several equity funds.

More cash. Fewer funds. This is how we hold down transaction costs on small portfolios.

[1] This paragraph describes a strategy called La Carpeta Negra Medium Term (LCN-MT), which is for buckets for which the investor has a medium-term horizon and the assets are held in a U.S. brokerage house. When the brokerage house is in Mexico, we use a modified version of this strategy called La Carpeta Rosa Mediano Plazo (LCR-MP). For each strategy in the La Carpeta Negra family of TransEconomics portfolio strategies described and reported on in this blog, we have a Mexico (La Carpeta Rosa) counterpart for clients who hold their assets in Mexico.

[2] Read descriptions of these portfolios here. Clients receive details on their composition in addition to individualized strategies and portfolio management services. To request more information, please write to patrimonial@transeconomics.com.