Find out if now is the right time to go back to the Stock Exchange – 06/22/2023 – From Grain to Grain

This is one of the questions I’ve been getting the most recently. Is not for nothing. The Ibovespa accumulates appreciation of 9.78% in the month, until the close of this Thursday. After an appreciation like this, a feeling common to all investors usually intensifies, the fear of being left out. Mainly, when we repeatedly hear that the market would be cheap. However, is this a good time to enter?

It seems almost obvious that the most recommended thing is to buy when it goes down and not when it goes up. However, seeing that others are winning and maybe you are not generates an uncomfortable feeling.

Usually, we believe that when it falls, it will continue falling and when it rises, it will continue to rise.

Understand, the market doesn’t move because of the past.

Past data serves to learn from what can happen and avoid mistakes.

Perhaps you are investing in a product referenced to the CDI or the Selic and regret not having invested more in the Stock Exchange at the end of May. After all, the appreciation of the Ibovespa this month alone is about 75% of what you would earn on the CDI throughout the year.

However, is it after an increase of more than 9% in one month a good time to get out of fixed income and jump into the stock market?

The past can tell how likely this is to be a mistake.

In this sense, let’s evaluate what happened in the last two decades after the market appreciated more than 9% in one month.

Over the past twenty years, the Ibovespa has appreciated by more than 9% in 25 months. Clearly, this is a rare event. It only occurred in about 10% of the months in this period.

Doing a simplified calculation, as a year has 12 months, you should only expect this strong movement to occur in just one month every 12 months. That is, if you lost, you need to be very careful in believing that it will happen again.

Let’s do another simulation.

Remember, you are eventually investing in the CDI and you are in doubt whether to migrate to the Ibovespa now.

In the last two decades, consider that just after the months in which the Ibovespa appreciated more than 9%, you redeemed from the CDI and invested in the Ibovespa. The result in the following 12 months was that the Ibovespa lost to the CDI by -1.76%, on average.

Do you remember that it is correct to invest when it falls?

If you made the same move when the Ibovespa fell 9% or more in a month, in the average of the following 12 months, the exchange brought a return higher than the CDI by 3.67%.

Yes, the market still looks cheap and should benefit from falling interest rates in the longer term. However, history shows that you should be very cautious about jumping in and investing right after a strong rally like the one we’ve seen this month.

Remember, the market does not go up linearly and evenly.

So, if you believe in the future potential of the stock market, expect a better entry point, but enter when it drops.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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