Investing in private fixed-income securities tends to give most investors butterflies in their stomachs. However, there is a well-known, albeit little used, way of having the premium of a private bond, but having security close to that of a public bond. I explain how much this strategy can help you reach your financial independence faster.
A fixed income security represents a promise to pay by the debtor who issued it.
If that issuer is a private entity, there is always a credit risk involved. That is, the possibility that for some reason, he is unable to pay.
In early 2023, the Americanas fraud drew the attention of investors to this fear.
I explained in the last chapter that building a well-diversified bond portfolio with high-quality bonds can greatly reduce this risk.
However, many would not want to go through any discomfort of having some issuer not pay.
The solution to this is to make use of bank issues, respecting the limit of the Credit Guarantee Fund, the FGC.
The FGC guarantees investments in CDBs, LCIs, LCAs, LCs and LHs up to a limit of R$ 250 thousand per issuer.
Thus, these bonds, when issued by medium-sized banks, have a very interesting premium. Additionally, FGC insurance provides security similar to that of a government bond.
It is possible to find CDBs from medium-sized banks, on distribution platforms, with rates up to 20% higher than those of equivalent government bonds.
For example, while in the Treasury Direct, it is possible to invest in a security that will pay 100% of the Selic, in brokerage platforms, you can invest in securities with a return of up to 120% of the CDI. I emphasize that CDI and Selic have the same return.
In securities referenced to the IPCA, something similar occurs. A government bond referenced to the IPCA maturing in 2029, the Treasury IPCA 2029 yields IPCA+6% per annum. On the platforms, you can find CDBs with the same term at IPCA+7.2% per annum. The real rate of 7.2% is 120% higher than the rate of 6% per annum.
Both bonds, CDB and Public Bond are taxed. Therefore, they are similar in this matter of charging income tax on income.
This difference of 1% in real interest may seem small in the short term, but it is significant in the long term. See the example.
Consider an individual who saves BRL 2 thousand per month in a CDB referenced to the IPCA with a real rate of 7.2% per year. After 30 years, it will accumulate the amount of R$ 2.43 million at today’s values.
The same individual, who makes this savings by investing in government bonds yielding IPCA+6% per year, will accumulate R$ 1.95 million.
Therefore, with the same effort, a CDB guaranteed by the FGC can take you further.
Thinking otherwise, with the same effort, the investor who took advantage of the private bond premium could have accumulated the same value as the public bond investor in less time.
The public bond investor would take 30 years to reach the same value that the CDB investor had already reached with 27 years.
Therefore, your financial independence can be anticipated or achieved with less savings effort if you take advantage of the 110% to 120% interest rate premiums existing on bank bonds. But remember that it is essential to respect the FGC limit.
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
Fixed Income
Chapter 9 You should not build an income portfolio if you want to reach equity to live on income
Chapter 10 Avoid these two common fixed income investor mistakes
Chapter 11 In fixed income, does it pay to invest in private credit in relation to public credit?
Chapter 12 Discover how to win the private fixed income premium, but with low risk
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