What we have to unlearn about investments (II)

Second and last part

In the first part we talked about the fact that there is no investment without risk. But it can be known and controlled. Today we are going to expand a little on this.

We have to understand that in any instrument that one invests, be it in Cetes, bank promissory notes, other debt instruments, stocks, gold and other commodities, there is never a guarantee that one will obtain profitability. In many cases, there is even a risk of losing money and ending up with less than what we started with when we started our investment.

In fact, there are two important risks that few people pay due attention to: inflation (loss of purchasing power) and the impact that implicit costs can have on certain financial products.

Many people still think, for example, that bank notes are very “safe” and have guaranteed returns. However, they generally offer interest rates much lower than inflation, so at the end of the term the money that one will obtain (including interest) will have less purchasing power than our initial capital had. In other words, one is losing money, guaranteed. It looks like we won, but actually we lost.

There are people who invest long-term through 28-day promissory notes that automatically renew at maturity. Fortunately, others already do it directly in Cetes for the same term, which are safer and pay a much higher rate. However, their return, in net terms (after taxes) is also often below inflation.

The problem is that they exclusively use short-term instruments for an investment that has a long-term horizon, because it has more “certainty”. However, over time, that capital will not grow in real terms. Your purchasing power is even likely to be lower. Although it seems that one has much more money.

This “certainty” has a very high cost, because investing with a long-term horizon is precisely that our money grows in real terms (purchasing power is much higher).

The foregoing does NOT necessarily mean that incorporating 28-day Cetes into a long-term investment portfolio is bad. On the contrary, they can be useful instruments to manage the risk of the portfolio, but always in an appropriate percentage with our investment objectives and with our risk tolerance. Which brings me to the next point.

The balance between risk and potential benefit

Whenever you invest, you expose your money to a certain level of risk. One might think otherwise, but the risk is always there no matter what we do with our money. Even if we decide not to invest it but only keep it under the mattress, we have the risk of it being stolen or destroyed in a fire.

As many of us know, investing in the stock market has its own risks. Every stock can go up or down in price (volatility). There are even companies that have gone bankrupt or have fallen to never get up again. But it is also true that in the long term, it is the market that has always given the greatest benefits. The reason is simple: companies are responsible for global economic growth. Not only that: also innovation and technological development.

If it were more profitable to invest in Cetes or put the money in the bank, no person would risk their money to start a business. No one would invest in companies. We do it because we are willing to take a risk, for a higher potential profit.

understand the risk

In investments, risk is defined as the volatility of an instrument or a portfolio (that is, how its valuation can vary). The key is knowing the amount of risk we’re willing to take (what we’ve called our risk tolerance) and then investing to get the highest possible returns for that given level of risk.

Since everyone has a different tolerance for risk, it is up to them and only them to decide how to build a portfolio with these characteristics.

The basis of any successful investment, however, is understanding and accepting that risk always exists and cannot be avoided, but that it can be learned to control and use it to our advantage.

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