Today’s devaluation of the Ibovespa makes many investors wonder whether it pays to invest in the stock market with such a high interest rate as an alternative. Last Monday I presented a simulation of three behaviors of how to invest in the stock market. However, some doubts were not answered: Did Ibovespa beat CDI and IPCA? Was it worth investing in the Ibovespa in the last two decades? Has any passive strategy with Ibovespa yielded more than the CDI? I answer these questions with data since 1999.
The first question raised was whether investment in the Ibovespa beat inflation in the last 22 years. Since December 1999, until last Friday, the Ibovespa returned 591%. Thus, an investment of R$ 150 thousand in the Ibovespa, appreciated to R$ 1.04 million. In the same period, the variation of the IPCA was 304%.
Therefore, the Ibovespa appreciated in the period equivalent to IPCA+2.37% per year.
However, Ibovespa did not beat CDI. In fact, he lost badly. The CDI yielded more than twice the Ibovespa and appreciated 1234% in the same period. An investment of R$ 150 thousand in the CDI increased to R$ 2.01 million, from 1999 to last Friday.
Note that dividends that are paid by companies within the index are reinvested in the index itself. Therefore, the appreciation of the Ibovespa considers capital gains and dividends.
The graph above shows the evolution of an investment of R$ 150 thousand in the CDI, in the Ibovespa, in the IPCA and in a fixed income security that yielded IPCA+2.37% per year.
Thus, answering the second question, the investment in the Ibovespa did not pay off over the last two decades.
As the CDI was much better than the Ibovespa, any strategy that involves spending time with the money invested in the CDI was better than investing only in the Ibovespa.
For example, if you invested a fixed amount in the Ibovespa monthly and kept the rest invested in the CDI, the result is always better than investing fully in the Ibovespa at the beginning of the period, as the CDI is the winner in the period.
And if you only applied when the stock market dropped 10%, would that have been a winning strategy?
Consider that you started your investments in 1999 with R$ 150 thousand invested in the CDI. Since 1999, there have been 19 months in which the Ibovespa has fallen by more than 10%. Assume that in the months following the fall of the Ibovespa, you withdraw R$ 5 thousand from the amount invested in the CDI and invest in the Ibovespa.
That is, it would be applying only after sudden drops.
Even buying only after strong declines, this strategy would have resulted in the same result as the CDI.
In the case where you invested in the stock market only when the Ibovespa dropped 12%, in this case it beat the CDI. As the Ibovespa only dropped 7 times more than 12% in a month, I considered that the investment in each of these moments was R$ 13.57 thousand so that the total amount invested in the Ibovespa would be the same as in the previous case.
The chart above shows the evolution of these last two strategies along with the CDI.
Therefore, with an interest rate as high as the one we have in Brazil, a passive investment strategy on the Ibovespa did not prove to be interesting.
Michael Viriato is an investment advisor and founding partner of Investor’s House
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