Opinion – Grain in Grain: How heavy is 500 grams and why does it affect your investment decision?

It seems strange when a finance professor asks you how heavy 500 grams is. Even more so when trying to relate this simple question to your investment decisions.

Almost all of us are capable of lifting an object weighing 500 grams. Actually, the question is not exactly about the weight metric, but whether you consider this object heavy or light. I believe most would say it is a light object.

So how long could you keep it suspended by your hands above your head?

Perhaps because you believe that this object is light, you say that you would be able to hold it for hours. Some will. However, you are more likely to overestimate your ability.

This overestimation of our ability occurs because we have never been through this test before and because of prior knowledge of a single lift of this weight.

When deciding to have risk in your investment portfolio, something similar often happens. Many times we go through a one-off event of loss and we already believe that we know each other.

You may wonder: what about investor profile assessment questionnaires?

Investment profile questionnaires fail to address this capability. They usually ask you what you would do if a market crash occurred. This question is similar to the question: how heavy is 500 grams.

Perhaps you have already been asked what the maximum loss you would bear, or whether a 0.5% loss would be acceptable. No matter what value you can support, what defines your profile is knowing how long you can handle this loss.

Investors in several Brazilian risk assets are going through this right now.

Even fixed income can also be categorized as a risky asset if it purchased a long-term bond and values ​​it in the short term. For example, who invested in a portfolio of public bonds referenced to the IPCA with a maturity of more than 5 years, measured by the IMA-B5+ index.

Whoever bought these fixed income bonds in November 2019, to this day lose more than 4% of the amount invested. There are more than 2 years in which the presented return is negative. It’s not a big loss, but I’ll bet that many of these investors, who believed that 500 grams was light, are starting to feel the weight and insecurity about their previous decision.

Something similar also occurs, for example, with real estate funds.

The biggest problem is that many times when you can hardly bear to carry the loss anymore, the positive return will start to arrive. But most people give up sooner.

So, if you’re going to start investing, start with less risk than you think you can handle. Only after going through a long down cycle will you really know your limits. By starting with less risk, you will be able to increase the risk weight in your portfolio if you feel you can carry it.

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

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