This application lost from the CDI in the last 12 months. So why invest? – 04/28/2023 – From Grain to Grain

Questions like the one in the title are the ones I hear the most. Commonly, investors fail to properly analyze risky products. This failure often leads to wrong decisions and frustration. I explain what the error is and how to analyze it.

When I talk about risky products, I am not just referring to stocks, but to any product that has volatility due to mark-to-market. For example, even government bonds referenced to the IPCA or prefixed have volatility and lead to this failure of analysis mentioned above.

Usually, investors analyze possible investments just by comparing the result in the recent past with the CDI or the Selic rate. In general, the previous year or the last 12 months are evaluated.

Yes, it could even be used in a few products. For example, some applications referenced to the CDI and short-term.

However, the generalization of this practice is not adequate.

I illustrate with an example.

Consider that you have at your disposal a CDB with a return of IPCA+7% per annum to purchase now and maturing in 1 year. What would you do to decide?
1 – Do I assess whether this CDB beat the CDI in the last 12 months?
2 – Do I assess whether this CDB should beat the CDI in the next 12 months?

In the last 12 months, an investment that pays 100% of the CDI yielded 13.37%. In the same period, the CDB with a return of IPCA+7% per annum appreciated only 11.41%.

Therefore, the CDB referenced to the IPCA yielded only 85.34% of the CDI in the last 12 months.

And now? With this information, would you invest in this CDB referenced to the IPCA? Is this how you are deciding your investments?

This is the procedure that the vast majority of investors adopt for almost all investment decisions.

However, it is not the most suitable. This form of selection leads many investors to make wrong decisions and miss out on opportunities.

Neither the CDI for the last 12 months will be the same as for the next 12 months, nor the IPCA. Therefore, the comparison with the past does not make any sense.

The inconsistency in the comparison becomes even greater when using risky assets.

The appropriate thing in this evaluation is always to use the projection, that is, what is expected to return in the future.

For example, for the expected CDI for the next 12 months, future yield curves can be used. In this case, the curve points to a CDI of 12.7% per year over the next 12 months.

Additionally, it is necessary to estimate the IPCA for the next 12 months. In this case, you might consider some economist’s projection of the average, or your own estimate.

Alternatively, it is possible to extract which IPCA would leave the two applications indifferent. In this case, the number would be an IPCA of 5.33% for the next 12 months.

I think there is a reasonable risk that the IPCA will surpass this number. Therefore, if I had to choose between just one of the two alternatives, I would prefer the one referenced to the IPCA. And you? Comment here which would be your preference.

Of course, in a diversified portfolio, it makes sense to have both. The important thing here was to illustrate the analysis process.

This same analysis process must be used for any asset, considering the probabilities of scenarios and risks inherent to each financial instrument.

So, be careful when evaluating the recent past and comparing it to the CDI to decide. Always remember the phrase repeated in all reports: past performance is no guarantee of future performance.

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 Don’t Invest in Stocks If You Think This Way
Chapter 27 Stock Investing Is For The Long Term, But Not For Every Term
…
Chapter 33
Chapter 34 When Should I Trade a Risky Investment That Is Not Performing?
Investment funds and Private Pension
Chapter 35 Find out when it pays to invest in investment funds
Chapter 36 Understand the five steps to select investment funds
…
Chapter 37 Multimarket funds disappoint in the semester; what to do?
Deciding your investment portfolio
Chapter 38 This application lost CDI in the last 12 months. So why invest?

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