1. Plan on living a long time
LEFT: We are living longer
Thanks to advances in medicine and healthier lifestyles, people are living longer. This chart shows the probability of reaching various age ranges for someone in Brazil who is 55-59 years old today. A 55- to 59-year-old couple might be surprised to learn that at least one of them has a 56% probability of living until age 85-89, needing investments to last another 30 years.
RIGHT: Many of us have not saved enough
Studies reveal that individuals are not adequately prepared for retirement. Investors should start early by saving more, investing with discipline and having a plan for their future.
2. Avoid home bias
LEFT: Home-country bias
While Brazil remains the largest economy in Latin America, it accounts for less than 3% of global GDP and just 1% or 2% of the world’s capital markets. Yet, statistics show that Brazilian investors may have 99% of their investments in Brazil-based assets.
RIGHT: Sector bias
Our investment biases show up in other ways too. Inherently, with Brazilians exhibiting an outsized home-country bias, they become susceptible to sector concentrations specific to the Brazilian market. Investing globally can help reduce sector concentration and increase diversification. It is important that investors are aware of these biases and employ a disciplined investment plan that can help minimize their influence.
3. Global Diversification works
Diversification serves a purpose.
The last 10 years have been a volatile and tumultuous ride for Brazilian investors, with a commodity cycle boom and bust, the global financial crisis, political change and the worst recession in recent history.
Yet despite these difficulties, and despite Brazil’s historically high interest rates, cash (CDI) was among the bottom performing asset classes from 2008–2017. Instead, a well-diversified portfolio including both domestic and global bonds and stocks returned 13.9% per year over this time period (and over 220% on a cumulative total return basis).
4. Don’t let the real or CDI keep you from investing globally
Many investors shy away from investing abroad because of concerns of losses from currency movements or because of fears of missing out on high domestic interest rates. This chart shows that whether you decide to take the risk of currency moves (by investing unhedged) or whether you decide to isolate the currency impact and benefit from domestic interest rates (by investing hedged), the 10-year average annual return is almost exactly the same at 8%! The difference is in the experience, with unhedged investments seeing a bumpier ride with a much higher 10-year volatility.
The important thing is to understand how unhedged or hedged global investments work – and to pick a vehicle to invest globally.
5. Avoid surprises by knowing what you own (Part 1)
Unhedged global investments come with currency risk.
LEFT: When investing globally on an unhedged basis, you need to have a view on two things: 1) the performance of offshore bonds and equities, and 2) the direction of the currency. Sometimes, the currency can make all the difference in the return that investors experience. For example, in 2016 the offshore asset return from a 50/50 balanced portfolio was 7%, but the unhedged return was -12% because of the currency move.
RIGHT: A weaker real will boost offshore returns, while a stronger real will detract from offshore returns. Currencies are notoriously hard to predict, but tend to bounce back from extremes.
5. Avoid surprises by knowing what you own (Part 2)
Hedged global investments come with interest rate differential risk.
LEFT: When investing globally on a hedged basis, you need to have a view on two things: 1) the performance of offshore bonds and equities, and 2) the difference between local and U.S. interest rates. Historically, Brazilian interest rates have been higher than U.S. interest rates; thus, the interest rate differential has consistently provided a boost to global returns. This has been a much smoother ride than unhedged investing.
RIGHT: The interest rate differential will not stay constant every year. It will depend on 1) the interest rate in Brazil, 2) the interest rate in the U.S. and 3) the convertibility between currencies. As the charts show, the interest rate differential has been shrinking over the past year as interest rates in Brazil have come down and interest rates in the U.S. have gone up.
6. Volatility is normal; don’t let it derail you
Every year has its rough patches. The red dots on these two charts represent the maximum intra-year decline in every calendar year for two equity indices: the Bovespa and the MSCI The World (developed markets), going back to 1998. While these pull-backs can’t be predicted, they can be expected, both in emerging and developed markets.
But despite the many pull-backs, roughly 55% (for the Bovespa) and 75% (for developed markets) of those years ended with positive returns, as reflected by the gray bars. Investors need a plan for riding out volatile periods instead of reacting emotionally.
Another important take away from this slide is the difference in both volatility and returns between the Bovespa and developed market equities, with average intra-year drops in the Brazilian market almost doubling that of developed markets. This is one of the arguments for adding a less volatile asset class, such as offshore equities, to a portfolio.
7. Staying invested matters
It’s always darkest just before dawn.
Market timing can be a dangerous habit. Sometimes, investors think they can outsmart the market; other times, fear and greed push them to make emotional, rather than logical, decisions.
This slide is a sobering reminder of the potential costs of market timing. By missing some of the market’s best days, investors can lose out on critical opportunities to grow their portfolios, with devastating results. Importantly, as the slide also notes, six of the 10 best days occurred within two weeks of the 10 worst days.
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