Opinion – Grain in Grain: Understand why time is your best ally in investments

There is no place where our natural anxiety is more evident than in investments. We want to see positive returns every month, higher than the CDI or the IPCA, and the higher of the two. This anxiety usually makes us make bad decisions and forget about what makes the biggest difference in investing.

The goal of any investor should be to beat inflation. This gain in excess of the IPCA must be planned in order to achieve its objectives and considering its investor profile. However, the problem does not lie in pursuing this goal, but in what timeframe to measure.

The only way to guarantee that your investment will generate positive returns is to have a portfolio of only fixed income securities. But even this does not guarantee that in the short term they will always be positive or even higher than the two indexes mentioned. I will give two real examples.

For example, consider that you are conservative and in your fixed income portfolio you have chosen to invest primarily in IPCA-referenced securities. If your portfolio has bonds yielding IPCA+5.5% a year, you probably won’t regret it in the long run.

However, this June, its portfolio, if made up of securities with only this return, will lose the CDI.

The IPCA that remunerates these securities in the month of June is 0.47%. Therefore, the resulting return on your portfolio in the month of June will be only 89% of the CDI.

Now see a longer term example. If you invested in treasury bonds in 2020, eventually, you might be heartbroken about your choice. See the real example below.

The figure shows an investment in April 2020 of BRL 109.69 in a Treasury Direct bond at a rate of IPCA + 4.52% per annum maturing in 2045.

In the investment period, that is, in 25 years, this investment will certainly appreciate above inflation and, possibly, more than the CDI.

However, after 2 years, this investment is still negative. That’s right, you would not only have lost the CDI and IPCA in the first two years, but you would also be losing R$ 2.62 of your initial investment.

This is an example of the mark-to-market effect of fixed income securities.

This application could have been made by an investor scared of the stock market crashes in February and March 2020, at the beginning of the pandemic. Looking at the CDI, which was losing the IPCA at that moment, the investor could have opted to exit the market and earn significant real interest (above the IPCA) for that moment.

We are currently experiencing high interest rates and strong market volatility. In these moments, the return observed in the short term causes anxiety and doubt about what to do.

If you follow the market, you know that there is always an investment that is or has been showing better returns in the short term. And we tend to want to chase it.

For example, we want to leave fixed income and go to the stock market, when it is high or has already risen a lot, and do the opposite movement, when the stock market has already fallen, like now.

Chasing market movements can lead to wrong decisions, because by the time you see that an investment is or was good, it may already be too late.

There is a phrase continually said in the financial market, which was reminded to me this Thursday by my friend Leonardo B.: “time in the market beats timing the market” (time in the market trumps trying to hit the market trend).

It doesn’t mean you need to hold on to a losing position. The portfolio must be continuously evaluated against the scenario. Sometimes changes are necessary. However, it is necessary to assess whether you are not being carried away by the mood of the market.

When asked what he would have done differently, Warren Buffett said: he would have started earlier. He knows well how time is one of the greatest allies in investments. More than ninety percent of his fortune was built after the age of 65, that is, more than 45 years after he started investing.

So, when evaluating your portfolio, be careful not to get carried away by the mood and volatility of the market. Try to understand if the investment has the capacity to generate good returns in the long term. Time can be the best ally for this investment to produce the necessary effects for you to achieve your goals.

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

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