For your investments to beat the CDI, you need to make two choices; understand – 04/21/2023 – From Grain to Grain

Most investors have a single objective: to earn more than the CDI. These three letters are pursued as a reference index, as they are synonymous with two pillars that conservative investors seek: liquidity and low risk. Beating CDI means choosing to pay a cost with two coins. I explain what these coins represent and the possible remuneration.

Contradictorily, for most investors, having low risk in Brazil does not mean having a guaranteed real interest rate above inflation, but having a yield equal to the CDI. The contradiction arises because there is a risk that the CDI will not gain from inflation, as has occurred in the recent past.

However, this CDI yield lower than the IPCA was a one-off event. Over the last 10 years, those who invested in the CDI earned an average annual real interest rate of 2.69% above the IPCA. Therefore, we can say that in the medium term, the CDI should provide a positive real interest rate.

The acronym CDI stands for Interbank Deposit Certificate. In the past, this index represented the rate resulting from loan transactions between banks. It resembled a CDB, but which only financial institutions had access to. Over time, this form of financing between institutions fell into disuse and the DI rate is now simply equal to the Daily Selic rate.

Therefore, when we talk about the DI rate, we are also talking about the economy’s basic rate, which is defined by the Monetary Policy Committee (COPOM) of the Central Bank.

The small conservative investor can have the two pillars of liquidity and low risk by investing in federal or private public fixed income securities.

The federal public bond that remunerates the Selic Daily is the Treasury Selic. Considering the FGC guarantee, a bank-issued security, such as a CDB, will also provide the same result or, eventually, a little more, but with similar risk.

To earn more than the CDI, the investor must pay a cost that represents the flexibility of the two pillars, that is: liquidity and risk. Let’s start with the “term” currency, represented by the loss of liquidity.

Thus, at low risk, you can earn 110%, 115% or even more than 120% of the CDI if you invest in CDBs with a grace period of 2, 3, 4 years or more. Therefore, you lose liquidity.

I reinforce that in order to benefit from the low risk, it is important that the investor always invest within the limit of BRL 250,000 per institution issuing the bond. This is the FGC guarantee limit.

I usually say that this is the first currency that investors should try to pay in order to have more returns than the CDI, that is, the “term” currency.

However, the “term” currency has a potential gain limit.

To further increase the earning potential, it is necessary to go for the “risk” currency.

It is important to understand that the potential return of the “risk” currency is not as clear as that of the “term” currency. In the latter, the return is expressed in the CDB. For example, you know that you can earn around 110% of the CDI in CDBs with a one-year grace period. And this will be your gain, but only if you hold the bond to maturity.

However, the same does not occur with the “risk” currency. Assets framed in the “risk” currency are stocks, real estate funds, real estate, multimarket funds, cryptoassets and even fixed income assets.

We can even make a forecast for the return to be obtained by them, but it is not possible to be sure about this profitability, as it is not defined in the contract. Therefore, these assets are most often known as variable income.

However, it is not just variable income assets that carry risk.

Even in fixed income, some assets have risk. For example, private credit fixed income securities without the FGC guarantee may provide a higher return, but carry some risk of the issuer not being able to pay.

Even a fixed-income government bond can be risky. For example, if you purchase a fixed-rate or IPCA-referenced security with a long maturity, but you need the resource before maturity. In this case, you may have negative return or much lower than contracted.

The art in building an investment portfolio lies in the most appropriate choice between “term” and “risk” currencies. This most suitable choice should align with your objective, investor profile, with the economic scenario and with your financial restrictions, such as liquidity.

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

Talk directly to me via email.

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Book: The Journey to Financial Independence

summary

Introduction
Understand how you will achieve your financial independence
Living on an income is the last step on the journey to financial independence
These are the biggest questions about the journey to independence

Part 1 Construction of the plan
Chapter 1 The first step in building the blueprint for financial independence
Chapter 2 How do you define the rate of return in your plan for independence?
Chapter 3 Find out what equity you need to achieve your financial independence
Chapter 4 On your journey to independence, don’t overlook the importance of this factor
Chapter 5 Understand the two ways I applied to increase my saving capacity
Chapter 6 If You Double This Factor, Your Equity Can Multiply Much More
Chapter 7 Connecting the dots to build your plan

Part 2 Assembling the portfolio to lead you to financial independence
Chapter 8 Before making any investment, define these two factors
Chapter 9 For your investments to beat the CDI, you need to make two choices; understand
Fixed Income
Chapter 10 You should not build an income portfolio if you want to reach equity to live on income
Chapter 11 Avoid these two common fixed income investor mistakes
Chapter 12 In fixed income, does it pay to invest in private credit in relation to public credit?
Chapter 13 Discover how to win the private fixed income premium, but with low risk
Chapter 14 This is the simplest way to plan your financial independence with fixed income
Chapter 15 With our interest rates, find out if it pays to invest in dollars
Variable income
Chapter 16 Taking a risk can accelerate your journey to financial independence
Chapter 17 What is multimarket funds and how did they come about?
Chapter 18 Understand how to select hedge funds
Chapter 19 Is Real Estate an Appropriate Investment for Achieving Financial Independence?
Chapter 20 Real estate funds are better investments than real estate, but most prefer the worst; understand
Chapter 21 These real estate funds are more like fixed income funds
Chapter 22 When selecting Real Estate Funds, be careful with this indicator
Chapter 23 Discover the five indicators that you cannot disregard in paper real estate funds
…
Chapter 26 Actions
Chapter 27 Alternative Investments
Chapter 28 When Should I Trade a Risky Investment That Is Not Performing?
Investment funds and Private Pension

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