The CDI cannot be an actuarial target in your investments; understand – 09/15/2023 – From Grain to Grain

Most investors pursue the CDI as the target return for their portfolios. However, it does not meet the necessary criteria for an actuarial target. Therefore, those who use this strategy run a serious risk of not achieving the desired objective.

First, let’s understand what the actuarial target is, as I realized that this concept is not common to everyone.

Actuarial target is a term usually used in the pension market.

In the social security environment, there is a liability represented by the set of cash flows owed to the retirement beneficiary. There is also an asset, made up of investments that must meet that future liability.

At an individual level, your liabilities are made up of your set of short, medium and long-term financial objectives. Assets are all your financial and real estate investments.

The actuarial target is the minimum or required profitability that makes the asset capable of honoring the flows necessary for its objectives.

After my last article, I received some emails from readers asking what actuarial target they should use.

Some readers asked whether the CDI could serve as this minimum return.

The CDI is not suitable as an actuarial target. Therefore, it is also not an interesting indicator for evaluating your portfolio in the long term.

The CDI is a financial indicator that can, as we have seen in the recent past, have profitability as low as 1.9% per year, that is, significantly lower than inflation.

Therefore, it is not possible to say how much the CDI should return above the IPCA in the future.

An actuarial target must be a profitability above an indicator that measures the loss of purchasing power of money, that is, above inflation. This occurs because everything you plan as a cost will increase in value in the future with inflation. Therefore, if the asset only rises due to inflation, it is not adding value, but only recovering the loss in value of money.

Therefore, your actuarial target and indicator to evaluate the performance of your portfolio should be a rate of return above the IPCA.

This profitability must be estimated taking into account your current assets, your financial objectives and your capacity for periodic savings. In other words, the actuarial target can be seen as the minimum rate that makes your financial planning coherent.

If you don’t have a financial plan, you can and should still set a minimum goal for your investments. Also in this case, the CDI remains inadequate as a metric for the long term, as it does not guarantee that you will have enough return to cover inflation.

As a general rule, if you want to be conservative in setting your target, consider a rate equivalent to 80% of the real interest rate, i.e. above current inflation. Therefore, a rate of 4% above the IPCA may suit those who are more conservative.

For the most daring, it is possible to use a yield of 20% above the real rate on public bonds. Thus, IPCA+6% per year could be a minimum objective return.

As an example, in Brazil, many private pension entities have actuarial targets of 4.5% per year above inflation.

As I wrote in the past, the main Brazilian stock index, the Ibovespa and the main American stock index, the S&P 500, have presented real returns over the last 20 years, that is, above their respective inflations of less than 5.5% per year. year. This is already considering dividends.

Currently, there are many private fixed income securities, such as CDBs, debentures, CRIs and CRAs with yields above IPCA+6% per year. Therefore, we live in an interesting environment to lock in a long-term return in fixed income capable of exceeding its actuarial target.

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

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