*updated* Are you better off keeping money in Brazil or the US?

*check out the calculator at the end of this post*

* New update: check out the Spoiler Alert section at the end where I calculated every possible combination of years between 1995-2023, allowing for a minimum length of 5 years time and posted a summary of the results*

The title is a bit off; my apologies. This post was inspired by a excellent comment from “Mente Investidora” who said:

“Qual foi o seu racional para definir em 12,4% o percentual de seus ativos nos USA? Fixo ou pode mudar ao longo do tempo? Como, historicamente, o Real tem uma inflação bem maior do que a d o Dólar, não seria prudente ter um percentual maior na última moeda, a fim de preservar o poder de compra?“

Translated: “What was your rationale for setting the percentage of your assets in the USA at 12.4%? Fixed or can it change over time? As, historically, the Real has a much higher inflation than the Dollar, wouldn’t it be prudent to have a higher percentage in the latter currency, in order to preserve purchasing power?“

What a great question! My first though was “Damn, I’m not sure”.

Exchange rate risk

Now in theory, in my head, exchange rate will ultimately follow inflation in the respective economies. Comparing the US verses Brazil, If inflation is higher in Brazil, the exchange rate will favor the US Dollar, to the same degree that inflation is different between those economies, roughly. That is not always the case, especially in the short term, and often you can find ‘deals’ (also known as geoarbitrage) where in a given foreign economy your home currency buys you more stuff.

That aside, what would have happened if at some point in the past, a person with US dollars decided to convert those dollars to Brazilian Reals, then invest those in the ‘risk free’ assets of Brazil, as compared to keeping those dollars in the US, and investing in the risk free asset there?

Cash assets, risk free

I chose ‘risk free’ assets because they make the most sense; it’s the cash rate and they’re most comparable. If you keep your cash in an economy, you keep it in a “cash equivalent” or risk free asset. The risk free asset in Brazil is the Tesouro Selic. It’s a short term government bond with a variable return, based on the central bank interest rate. It has essentially no default risk, because it’s issued in Reals, and the government can just print more Reals. It has no mark-to-market risk since the interest rate is always the same between new and previously issued notes. The equivalent in the US would be 90 day Treasury Bills.

Now, if you convert your money to another currency to make a higher rate of interest you face the risk of the exchange rate fluctuating in such a way that is not in your favor. In fact, this is a common trade in the world of high-finance, often called a “carry trade”. In a carry trade, usually a hedge fund will borrow money in one currency with low interest rate, then convert that currency to one with high interest rates, and buy bonds. They pocket the difference in the rate they pay verses what they are paid in interest, in the other currency. It works great, until the exchange rate fluctuates.

Positive real rates verses inflation

Since the Real Plan, Brazil has basically always paid a positive real return on the Selic rate. What does that mean? The ‘real’ return, is the purchasing power you make by investing. So if inflation is 2% and your investment yields you 5%, your ‘real’ return is 3%. Although you made 5%, you lost 2% of that to inflation, so you can only actually buy 3% more stuff. That is what happens in Brazil.

In the US, using the risk-free or cash-equivalent assets, Treasury Bills, there is almost never a ‘real’ return, at least not in recent history. As of late, you can make a lot in the stock market, but that’s about it. In the US, the scenario is more like this: you invest in Tbills, an earn a return of 2%, but inflation is 5%, so you loose 3% purchasing power.

In theory, over time, if you invest in an economy with a positive real rate of return, your returns should outpace the degradation in the exchange rate, because that should be linked to inflation. Does this actually work? I did a basic study on US verses Brazil right after I got the comment from “Mente Investidora“.

Random test

I somewhat randomly chose 2006-2023. After 2006 the Selic rate was about 15% or less, so more reasonable than the prior super-high rates. What would have happened if I sent US $1,000 to Brazil in 2006, invested in in Tesouro Selic, then sent the money back to the US in 2023. Would I have been better off just keeping it in the US?

It turns out, the $1000 invested in Tbills in the US during that time period would be worth $1,271 in 2023, however inflation means you would need $1,499.14 to have the same purchasing power as $1,000 in 2006. Not a good return.

If instead, I converted the $1,000 to Brazilian Reais in 2006, I would start with R$2,175.32. Invested in the Tesouro Selic the whole time I would finish with R$12,240.01. Convert that back to US dollars in 2023 and I would have US $2,450.76. BAM! Much better.

So is it crazy to keep so much of a portfolio in BRL. Well, based on that one test, no, not crazy at all. Again, in theory, if you have money in an economy with negative real rates, and instead you invest in a economy with positive real rates, you should do fine. The real interest should outpace any exchange rate disadvantage. This assumes no major issues, like hyperinflation.

“Sequence Risk” cheat code!

This has major implications on sequence of return risk. I will write a separate post on this, but in short, if your portfolio goes down in value early in retirement, you have to sell more assets (a greater number of shares of stock, for example) to get the same amount of cash to fund your lifestyle. That leaves fewer assets left when the market goes back up, so you may never recover to the original portfolio value, and may not be able to sustain your retirement. Another way to think of this, is highly volatile investments are a HUGE risk in the early years of your retirement. Moving assets into an investment that provides a real rate of return with zero volatility could be an enormous advantage, which is exactly what you have available in Brazil. More on that in a later post.

Try out the calculator!

So, after the one test I ran from 2006-2023, I thought, “wouldn’t it be cool to be able to test any range of years in this same scenario?”. So I made a quick and dirty calculator to do just that. I have thus far found one bad sequence which is 2011-2015.

Try it out. Let me know in the comments what years result in a negative return for transferring your assets to Brazil. Believe it or not, those sequences of years are pretty difficult to find (for me at least).

In the calculator below, enter the amount of USD you want to transfer to Brazil, then select the year you send it in order to invest in the Tesouro Selic, then select the year you transfer it back to USD. See if you would have done better or worse than keeping your money in USD the whole time. Let us know how you did!