Opinion – From Grain to Grain: Before investing in pensions, avoid these two flaws

When deciding how to invest in pension products, most investors make two mistakes. I discuss below what these flaws are and how to fix them.

The graphs below show how investors distribute their investments in investment funds and in private pension funds, according to Anbima.

Although there are conservative, moderate and aggressive investors, when we collect the general market distribution, this represents the average. Therefore, the two charts above indicate what investors with a moderate profile would be adopting in their investments.

In fact, the distribution of investments in investment funds seems to have the moderate profile indicated in the slides of the main financial institutions.

The disposition of investments in pension funds, however, does not follow the same division. But should they follow?

Nobel laureate in finance Richard Thaler explains that individuals tend to sort their resources into different “boxes.” Investors label every part of their equity, such as the school “box”, the travel box, the retirement box, and so on. Thus, they end up making irrational decisions about their investments.

The first failure that investors commit when they decide to invest in private pension funds is to separate it as the resource of the “cash” of retirement.

Your portfolio is a whole that must meet short, medium and long-term goals. But separating one type of vehicle, such as pension plans and labeling them, can lead you to a wrong decision like the one I’m going to explain.

First, I’ll ask you two questions: should your investments in private pension funds have a more aggressive or more conservative profile than the rest of your portfolio? Should they exhibit greater or lesser volatility than the rest of the portfolio?

The portion invested in private pension funds is only a fraction of the total invested in funds. According to Anbima, the share in private pension funds represents 15% of total investment in funds.

The charts above explain not only how investors think, but how they have put this thinking into practice.

The answer from most investors is that investment in pension products should have a more conservative profile, that is, less volatility than the rest.

This thought occurs because, possibly, investors put their pension plan in the retirement “box”. And they fall into the behavioral bias trap.

Investors are usually more afraid of losing money in a short period in the share of provident funds than of not achieving, in the long term, sufficient wealth for their retirement.

There are two reasons why your pension fund has, on average, a more aggressive profile and, therefore, greater volatility than the rest of the portfolio: investment horizon and tax benefit.

Usually, the portion allocated to pension plans has a long-term horizon. The reason for this view is the higher taxation that the pension fund has in the short term.

We know that higher risk investments should be made in resources that you plan to keep for a period longer than five years. As is the case with provident funds.

The tax benefit is the one that best explains why its pension plan has a bolder profile than the rest of the portfolio.

Riskier investments are those that have the greatest potential for long-term results. With a bigger result, also comes a bigger income tax. To pay less IR, you’ll want the IR rate to be as low as possible.

Private pension funds have an income tax rate that reaches 10% after ten years of application. Excluding exempt products, this is the lowest rate on investment products. Therefore, the portion with the greatest potential to bring positive returns, consequently, the one with the greatest risk, must be concentrated in pension funds.

Note that I am not saying that your pension should be invested in variable income, but only that it should have a higher risk profile than the rest of the portfolio. Reflect on this in your next applications.

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