Opinion – From Grain to Grain: This is one of the biggest mistakes made by those who decide to invest internationally

The main reason to invest internationally is diversification. However, the lack of knowledge and the great diversity of options make most Brazilians make a big mistake when investing internationally. I comment on this error and what to do to correct it.

Yesterday I explained that many who send resources abroad, err in defining the goal of achievement. Several are frustrated with returns or with the difficulty of choosing and others, who seem more determined, contradict the objective.

When I ask investors the reason for sending funds abroad, most answer that it is to protect themselves. Next, I ask: protect yourself from what?

The answer to this question is usually one of the following:
1- the government can take our money;
2- Brazil can break.

I don’t believe any of these events occur, but that doesn’t matter. The big problem is that the vast majority who believe in these two risks tend to be more conservative and want to invest in fixed income.

As I mentioned yesterday, the objective for investing abroad should be diversification.

However, whether your goal is diversification or “hedging” against the above risks, most fixed income seekers make a big mistake.

The flaw is to invest in fixed income securities, called bondsfrom Brazilian companies.

Let’s look at it from both perspectives. Starting with diversification. If you sought diversification and applied in bonds of Brazilian companies, your goal will not be achieved efficiently.

The return on bonds of Brazilian companies, even abroad, suffers from many of the same variables as the bond of the same company issued in Brazil. It is also influenced by Brazilian economic variables.

Therefore, it will have a high correlation with Brazilian bonds. That way, you don’t have a good efficiency in diversification.

The second case is if the reason for sending the money was similar to what the reader Rodrigo J. said in the comment on yesterday’s text. He explained that the reason would be legal uncertainty. In this case, possibly, the investor is afraid of the risks mentioned above.

In this case, buy bonds of Brazilian companies is as bad as buying the securities of these same companies in Brazil. If the Brazilian government takes any action, such as blocking resources, defaulting or putting corporate legal security at risk, the securities of Brazilian companies abroad will plummet in value.

Which foreigner will want to buy a Brazilian bond if any of these risks materialize? Obviously, almost none. Soon you will have losses similar to having the resources in Brazil.

So the reason you sent the money out goes down the drain.

The great diversity of fixed income assets abroad and lack of knowledge are responsible for this error.

The only reason to buy bonds issued by Brazilian companies abroad is to just want to have currency exposure, as you have a debt or liability in dollars to fulfill.

So, what is the simple way to invest in fixed income abroad in order to diversify or protect against the risks mentioned above? I explain this answer in the next article.

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

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