Opinion – From Grain to Grain: We compared two strategies for investing BRL 100,000; see which is the best

When we evaluated the last 22 years, the Brazilian fixed income was unbeatable in relation to the Brazilian stock market. While the CDI has yielded the equivalent of 11.97% per year since December 1999, the Ibovespa has appreciated by only 8.65% per year in the same period. However, a differentiated strategy could have improved these results.

In the last article, I mentioned three main allocation strategies: Buy and Hold (BH), Constant Mix (CM) e Constant Proportion Portfolio Insurance (CPPI).

Today I will compare the first two.

The BH strategy is known for its simplicity. In it, the investor invests in variable income and fixed income in a certain proportion and maintains the investment for the entire period without worrying about the changes that occur due to the evolution of each of the assets.

Following this strategy over the last 22 years, as the Ibovespa performed worse than fixed income, any initial proportion that had chosen would have performed worse than allocating 100% of the portfolio to fixed income.

the strategy Buy and Hold involving risky assets is only efficient when it presents a result superior to fixed income in the long term.

Therefore, the famous saying “buy and forget” has not proved interesting in the last two decades, unless it referred only to fixed income.​

Another strategy that can turn this game around and makes a lot of sense for the Brazilian market is CM. In it, the investor determines a proportion of the portfolio in stocks and his job is to rebalance the portfolio, periodically, to keep this proportion constant.

Thus, when stocks fall, the investor should rebalance the portfolio by buying and, when stocks rise, he must sell the stocks, always returning to the initial proportion in the portfolio.

This strategy makes more sense than BH in the Brazilian market, since as can be seen in the chart below, the Ibovespa is highly volatile, but has not performed better than fixed income.

The key to this strategy is finding the right moment to rebalance. Contrary to what many say, rebalancing should not be based on a period, for example, six months or annually.

Frequent rebalancing can reduce the return and increase the risk of the portfolio. Therefore, it should only be performed when necessary and not by time.

As Nobel laureate in economics William Sharpe states in his article Dynamic Strategies for Asset Allocation, the rebalancing must consider an oscillation in variable income.

For example, consider an allocation of 20% on the Ibovespa and 80% on the CDI. When the rebalancing is performed whenever the Ibovespa varies 31% down or up, the result for the portfolio in the last 22 years was a return equivalent to 12.25% per year.

However, if the exchanges had occurred for variations of 15% of the Ibovespa, the result would have dropped to 11.96% per year in the same period.

The chart above shows the evolution of the CM strategy for the two aforementioned rebalancing measures.

The CM strategy will only lose to the BH strategy if variable income performs better than fixed income in the long run.

I reinforce that I am not recommending that investors should have this 20% allocation on the stock exchange and carry out this aforementioned rebalancing. But, draw attention to other capital allocation strategies that may present better results.

In the next article I will write about the strategy Constant Proportion Portfolio Insurance (CPPI). As reader Aguinaldo recently asked about how to manage the allocation considering the life cycle, CPPI can be an alternative in retirement.

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

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