Find out why frequent contributions are so important to increase a portfolio’s return – 08/05/2023 – De Grão a Grão

The discipline of periodically saving is a very difficult habit for most individuals. Usually, we want to plant just one seed and we want a forest to develop quickly and robustly. Sometimes this happens, but if we planted more seeds, the result would undoubtedly be better. The same goes for investments.

Less than 30% of our company’s clients regularly contribute monthly to their portfolio. Not by coincidence, it is observed that the risk-adjusted result of these, on average, is usually better.

There are two reasons that justify the habit of investing regularly to increase the return on your portfolio.

Both are related to capturing opportunities in time. And this isn’t just for aggressive investors. Even conservative investors capture this benefit as I will demonstrate.

The first justification has its analogy in buying supermarkets for the home. I don’t need to convince you, because you already know that those who buy groceries once a week capture more opportunities than those who only do it once a month.

In investments, something similar happens. The dynamics of the economy often surprises with a rise or fall in inflation, or with a rise or fall in interest rates. Therefore, periodic investment allows capturing positive surprises.

For example, in mid-2021, Selic was at 4.25% per annum.

At that time, according to the BC’s Focus report (link), the Selic rate in 2022 and 2023 was expected to be 6.5% per year. The federal public bond referenced to the IPCA (IPCA Treasury 2026) was traded at IPCA+3.5% per annum. Therefore, investment in a CDB yielding IPCA+4.5% per year for 2026 was excellent, low risk and yielding above the CDI and Selic.

We know what ended up happening. The Selic rose more than double what was expected at that time.

Consider two investors. One of them made a single investment of BRL 500,000 in CDBs referenced to the IPCA at that time. The other made the same investment of BRL 500,000 in the same CDB, but invested another BRL 5,000 per month in CDBs with the same maturity date.

Thus, the investor who made the additional contributions was able to increase the average return of his portfolio, as he invested in CDBs at IPCA+5%, IPCA+5.5%, IPCA+6% up to IPCA+7% per year.

The second explanation why the return of those who make periodic contributions tends to be better is related to the volatility of assets. To illustrate this effect, I’ll use an example.

Consider two investors who decided to invest in Ibovespa in the last 5 years. One of them invested R$ 100 thousand exactly 5 years ago. The other invested in the Ibovespa, but initially contributed only R$40,000 and monthly invested another R$1,000, totaling the same R$100,000.

The Internal Rate of Return (IRR) of the first investor, the one who made the single contribution, was 8.66% per year. Those who made periodic contributions had an IRR of 9.85% per year. Therefore, the periodic contributions generated an additional return equivalent to 113.74% of the return of those who made the single contribution. In the long term, the composition of this additional return makes a difference.

The greater the volatility of an asset’s returns, the greater the advantage of periodic investment.

Thus, acquire the habit of contributing monthly to your portfolio. This discipline, in addition to providing greater portfolio growth so that you can reach your financial goals faster, will also result in greater returns for your portfolio.

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

Talk directly to me via email.

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