Opinion – Grain in Grain: What profitability to consider in investments for retirement?

The profitability presented by Brazilian assets in the last two years left investors in doubt about what to expect in return for their portfolio. This expectation is important, as the projection of investment returns is a key part of retirement planning.

There are a number of essential issues for planning retirement and profitability in the period of accumulation of wealth is at the heart of this plan.

Usually, the past average return is used as an estimate to project the future. But is it reasonable to make use of this past return?

See in the table above that none of the main Brazilian investment classes performed above inflation, measured by the IPCA, in the last 2 years.

Everyone knows that the first objective of investing is to obtain a return above inflation. Thus, when faced with the table above, the first reaction of the investor is to stop because they no longer know where to allocate their capital.

Sometimes, this fear even causes the interruption of investments and the investor begins to disinvest and buy assets in fear of low returns. This is a fatal mistake for retirement. As I have recently shown, in building your fortune it is more important to seek to raise your contributions a little in order to have the greatest return.

The point is that it is not always appropriate to consider past returns as a reasonable sample to predict returns over the next 10 to 30 years. Mainly, if considering a short-term return to project long-term returns.

The future return must be evaluated, considering the scenario of expected profitability and not the past. The simplest example to illustrate is using the investment in a security referenced to the IPCA.

In the last 2 years, IPCA-referenced securities, maturing in more than 5 years, had an average negative return of -1.41%.

However, if you invest now in a bond maturing in 2040, you will earn a return of 5.4% per annum above inflation. This return may vary over the years, but at maturity it will have exactly this return.

So what happened in the last two years doesn’t matter what you’re going to get in return on this fixed-income security over the next 18 years.

In the case of stocks and real estate funds, investors’ desperation to project is even greater. In a fixed income security, at least there is a promise about what return will be obtained. In variable income there is no such promise.

However, it is possible to build an estimate for the long-term return. As the figure above shows, it is possible to demonstrate that if an asset is at its fair value, its expected return will be the sum of the expected dividend gain and the expected growth rate (g) of earnings.

This model can be used both for real estate funds and for a stock index such as the Ibovespa.

In the case of real estate funds (FIIs) it is simpler. As shown in the figure below, the average dividend gain for the B3 Real Estate Funds Index (IFIX) is 10% per year.

It is reasonable to say that profit, represented by rents, should rise with the IPCA. After all, rents are adjusted for inflation.

You can be more conservative and give a 30% discount on the FIIs’ current dividend earnings. Thus, the long-term expected return for this class could be estimated at IPCA + 7% per year.

Similar reasoning could be made for the stock market, represented by the Ibovespa in the figure above.

According to Bloomberg, the dividend gain for the Ibovespa is currently at 8% per year. This number seems high and it is reasonable to give a discount of 30%, that is, considering 5.6% per year of expected dividend gain.

Likewise, you can estimate the long-term return from the expected growth in earnings. I believe that Ibovespa’s share profits should grow in the long term above inflation.

Therefore, if we consider that the Ibovespa’s share profits grow on average 2% above inflation, it is reasonable to assume an expected return for the Ibovespa of IPCA + 7.6% per year in the long term. Thus, if we believe in an IPCA of 5% per year over the next 10 years, a long-term return of close to 12.6% per year for the Ibovespa would be expected.

Note that I am not saying that the return of the stock market and real estate funds will be positive this year or next. But, it is reasonable to estimate that the 10 to 30 year return will be above inflation.

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

(Follow and like De Grão em Grão on social networks. Instagram.) ​ ​

If you have questions or suggestions for topics that you would like to see commented on here, please feel free to send them by e-mail