Opinion – Grain in Grain: How much can you earn by investing in fixed income in a simple way?

The rapid rise in Brazilian interest rates is confusing investors. When he evaluates his portfolio, he sees a return, but when he hears about prevailing interest rates, he sees something completely different. This mismatch makes it difficult to understand how much fixed income actually yields.

Usually, the Brazilian fixed income investor is used to two basic yields, the savings and the Selic or CDI rate.

They are basic, but these two instruments alone cause a lot of confusion. To evaluate this, let’s do a little test (not worth pasting on Google).

1) How much did savings last year (2021)?

a) 8.35% per year
b) 5.29% per year
c) 2.94% per year
d) 1.12% per year

2) How much did the CDI earn last year (2021)?

a) 2.12% per year
b) 4.42% per year
c) 7.46% per year
d) 12.65% per year

Following these two variables over time, with the strong change that has occurred, is not natural for most applicators.

After the last increase in the Selic rate, which took place in early May, the DI rate, or CDI, became 12.65% per year and savings are yielding around 8.35% per year. However, this is the profitability you will earn in the future and not what you have earned in the past.

These values ​​are much higher than what the investor sees accumulated in his portfolio over the last 12 months and what has yielded in the past.

Normally, profitability charts present these two timeframes for evaluation and we know that investors’ decision often takes into account what has yielded in the past.

This difference between past and current returns often leads investors to believe that, seeing a portfolio return lower than what is announced in the press, their products would be wrong. See the size of the difference.

In the last 12 months ending in May 2022, CDI and savings yielded 7.46% and 5.29% per year, respectively. In 2021, CDI and savings increased by 4.42% and 2.94% per year, respectively. How did you do on the test above?

I emphasize the size of the difference. The CDI yielded in 2021 almost a third of the current profitability and less than savings. Thus, it leads the investor to the frustrating wrong conclusion: my fixed income portfolio yields less than savings.

Realize that looking at what has yielded in the past brings little information and can also lead to wrong decisions.

The investor who invests in instruments that yield the CDI, if he evaluates the profitability of the last 12 months of 7.46% per year, may end up wrongly deciding to migrate to savings, as this seems to yield more, when the yield is evaluated. annualized just from the last month of 8.35% per year.

In fact, investment in fixed income goes far beyond these two yields, that is, CDI and savings.

To choose where to invest in fixed income, there are three basic decisions to make:
1) what is the deadline?
2) which indexer?
3) which issuer?

These three decisions influence the profitability you will obtain in the future.

We know that the CDI or the Selic will benefit from savings. However, in order to obtain returns greater than the Selic rate or the CDI rate, it is necessary to choose these three variables properly. But, we will leave the explanation of these three variables for a next article.

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

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