A portfolio with 40% of its assets in stocks may be considered conservative, according to the American Association of Individual Investors. Its model portfolio is intended for investors with a time horizon of at least 10 years. Many Brazilian investors, by contrast, might see that allocation as aggressive.
There is no single answer to which view is right. The decision depends not only on an investor’s stated risk profile, but also on available alternatives, ability to withstand market swings, risk constraints and financial goals.
The comparison between the United States and Brazil helps explain why investors may choose different allocations. US real interest rates—rates adjusted for inflation—were below 2% for much of recent decades, although they have risen lately. Over the past three decades, the S&P 500 delivered an average real return of 5.7%.
Brazilian government bonds linked to inflation, however, have often offered high real rates. An investor who secured a return of inflation plus 6.1% a year over the past two decades might reasonably ask why they should take on stock-market risk. The answer depends on whether the expected return from shares, along with their risks and diversification benefits, justifies an allocation.
Stocks represent ownership in a company, giving investors a share in its results and potential growth. Unlike fixed-income securities, whose returns are tied to specified terms, shares can benefit from expanding profits and value creation over time—but they offer no contracted return.
That potential comes with uncertainty. Profits may disappoint, competition may intensify, debt may weigh on a company, and its share price can fall sharply even if the underlying business remains healthy. Investors therefore expect a risk premium: an additional return over investments considered safer. But that premium is an expectation, not a guarantee, and actual results can differ.
Brazil’s market history illustrates the gap. Over the past 20 years, the Ibovespa returned 8.7% a year, compared with 10.1% for the CDI. The small-company index returned 6.8% annually, while an index of dividend-paying stocks returned 13.1% a year. These figures show that investing in stocks does not automatically compensate investors for taking risk: results also depend on which companies they choose and the period measured.
The Brazilian stock exchange represents only a small part of the global equity market. Investing solely in local shares means missing opportunities elsewhere, including sectors with limited representation among Brazilian-listed companies. Shares, funds and ETFs can provide exposure to companies in the United States, Europe and Asia. International diversification can reduce reliance on one economy, though it does not eliminate losses and may add currency risk.
Choosing to invest in stocks is only part of the decision. Investors must also consider what to buy and at what price: even an excellent company can be a poor investment if its shares cost too much. Holding only a few stocks can also increase risks that a diversified portfolio might reduce.
An investor’s willingness to take risk is not the same as their ability to bear it. Someone who needs money in two years to buy a home may be less able to withstand a market decline than a retiree with substantial assets, sufficient income and a horizon of more than 20 years.
Avoiding stocks also involves a trade-off. Keeping all assets in traditional fixed income may reduce certain uncertainties, but it means giving up direct participation in companies’ growth. That does not make stocks mandatory, but it makes the decision to avoid them worth examining.
The article’s author, financial planner and Casa do Investidor co-founder Michael Viriato, argues that not every Brazilian investor needs to own stocks. Investors should nevertheless understand both what they forgo by staying out of the market and what they might lose by investing.
Sources: Folha Mercado.