Opinion – From Grain to Grain: Avoid these two mistakes common to fixed income investors

“Someone, who made a mistake and didn’t correct it, is making another mistake.” This thought of Confucius can be very well applied to investments. In fact, in investing, it’s not “if” but “when” you’re going to make mistakes. In this way, at all times, we must look for where we are making mistakes in investments to correct them as quickly as possible. Even in fixed income, investors make mistakes when investing.

When it comes to fixed income, two mistakes usually occur. The biggest one is the fixation on wanting all assets to beat the CDI at all times. I reinforce that the DI rate is equal to the Selic rate. Therefore, talking about one is the same as talking about the other.

In the short term, that is, in the next two years, the CDI remuneration is very advantageous in relation to the available rates. However, if you only look at the short term, you may miss the long term target.

This higher CDI should not persist for more than two years. At the end of this year, it should already be a little lower than the current 13.65% per year.

Along with the fall in the CDI, all other fixed income rates should also fall, including those for IPCA-linked securities.

Today, it is possible to invest in IPCA-linked securities with a real rate of more than 6% per year.

The table below shows that an IPCA-linked security with a real interest rate of 6% per year should yield only 88% and 94% of the CDI in 2023 and 2024, respectively.

In 2022, the investor who invested in securities referenced to the IPCA has already experienced a lower result than the CDI.

It seems uncomfortable to lose from the CDI last year and the next two years. However, this remuneration relative to the CDI should increase and reach 146% of the CDI as of 2027, as shown by the yellow cells.

However, whoever pays the price of losing the CDI at this moment will only have a remuneration of 146% of the CDI in the future.

This occurs because the real rate of 6% per year today should fall next year.

The projected scenario for the CDI and IPCA is represented by a market average and shown in the green cells in the figure above.

This real interest rate of 6% per year can be found in federal government bonds. Private bonds, on the other hand, pay even more, but are often disregarded.

This is the second mistake that investors often make: not taking advantage of the interest premium on corporate bonds.

When I speak of private securities, I am referring both to bank securities such as CDBs, and to those issued by companies and exempt from IR such as debentures, CRIs and CRAs.

Bank Deposit Certificates, known by the acronym CDB, show returns of over 7% per year above the IPCA.

Corporate bonds, on the other hand, have a real rate of 7% per annum or more and several still have the benefit of exemption from income tax. This IR exemption is equivalent to adding almost 2% more real interest, when compared to a taxed title.

Therefore, for those with a long-term investment horizon, that is, more than 5 years, having a portion of the portfolio in bonds referenced to the IPCA, with maturities of 5 years or more and privately issued is essential to generate more value to the portfolio in the long term.

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

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Book: The Journey to Financial Independence

summary

Introduction
Understand how you will achieve your financial independence
Living on an income is the last step on the journey to financial independence
These are the biggest questions about the journey to independence

Part 1 Construction of the plan

Chapter 1 The first step in building the blueprint for financial independence
Chapter 2 How do you define the rate of return in your plan for independence?
Chapter 3 Find out what equity you need to achieve your financial independence
Chapter 4 On your journey to independence, don’t overlook the importance of this factor
Chapter 5 Understand the two ways I applied to increase my saving capacity
Chapter 6 If You Double This Factor, Your Equity Can Multiply Much More
Chapter 7 Connecting the dots to build your plan

Part 2 Assembling the portfolio to lead you to financial independence

Chapter 8 Before making any investment, define these two factors
Chapter 9 You should not build an income portfolio if you want to reach equity to live on income
Chapter 10 Investing in Fixed Income for the Long Term