Charting stock returns Brazil & US

Tying into the theme of the last post *updated* Are you better off keeping money in Brazil or the US?, which related to keeping cash at the cash rate in either country, what about risk assets? Using 1995-2023 data, let’s see how the Brazilian investor would have done in various assets.

Above you can see the growth of R$1,000 in the Brazil bonds, Brazil stocks, using the Ibovespa index, and the effect of inflation on that R$1,000. No surprises here for those who follow the asset’s historic performance.

Since we’re talking about risk assets, what about the Ibov verses the SP500, investing $1,00 USD in the SP500, verses R$1,000 BRL in the Ibov?

The investor ends up with either $17,936.33 USD investing in the SP500 (16,936% return) or R$30,742.90 in the Ibov (29,742% return). Pretty impressive returns for the Ibov, relatively speaking! However this does not take into account the respective value of the currencies.

How does the SP500 do in BRL, verses the Ibov, also in BRL?

Here you can see both indexes, starting with R$1,000 invested, but the SP500 is corrected by the exchange rate. You can also see the exchange rate, multiplied by 1,000 so it shows up on the chart. Here you can see that when investing in foreign assets, the exchange rate fluctuations can work either for you or against you, and in this case the SP500 returns are both amplified by the exchange rate, and reduced by it depending on the time period.

How about the other way around? What about $1,000 US invested in the SP500, or converted to BRL and invested in the Ibov?

Quite predictably, the Ibov returns are mostly suppressed by the exchange rate.

Here it is all together:

If the Brazilian investor, starting with R$1000 in 1995, invested it in

• The Ibov, it would have yielded R$30,742.90 at the end of 2023.
• The SP500, when corrected for the exchange rate would have yielded R$89,580.86
• The Selic would have yielded R$60,749.71

Retired and making regular stock withdrawals

How do the returns compare when adding in a 4% withdrawal rate? Due to sequence of returns risk, withdrawing assets when the market is down can make it more difficult for the portfolio to recover. Let’s see:

Here we see the portfolio performance with a starting balance of R$1,000,000 (all assets in BRL), while withdrawing 4% from the initial portfolio, and again withdrawing an amount at the beginning of the year adjusted by IPCA from the previous year.

The final values are:

• Ibov would have R$12,378,996.24 remaining at the end of 2023. This is R$15,363,906.64 less than you would have had without withdrawals.
• The SP500, when corrected for the exchange rate would have R$53,593,613.28 which is R$35,987,243.80 less than without withdrawals.
• The Selic would have R$40,834,243.67 remaining, which is R$19,915,469.19 less than without the withdrawals.

Here are what the withdrawals look like:

The withdrawals begin at R$40,000 and end at R$254,636.48 in 2023. The total sum of the withdrawals comes to R$3,654,444.27.

• The withdrawals had a -49.97% impact on the ending balance of the Ibov investment.
• The withdrawals had a -32.78% impact on the ending balance of the Selic investment.
• The withdrawals had a -40.17% impact on the ending balance of the SP500 in BRL investment.

As one would expect the largest impact on sequence risk was on the assets that fluctuate most in price. In down years you sell more ‘shares’ and there are fewer shares remain to go back up in value. The Selic investment with the least fluctuation was impacted least by sequence risk.

Saving, and making regular stock contributions

So in this scenario we will make regular contribution to sum invested. Unlike the last scenario, where higher volatility assets performed worse, in this scenario, the higher volatility assets may have an advantage. Why? It’s due to Dollar Cost Averaging, which is basically the opposite of Sequence of Returns Risk.

With Dollar Cost Averaging, You make regular contribution. Sometimes when the market is up, you end up buying less of the asset (fewer shares of stock, due to the higher price). When the market is down you buy more shares, because of the lower price. Dollar Cost Averaging means you automatically buy more shares at a low price, and fewer at a high price. It’s because of this that a high volatility assets may be of benefit, because it has higher highs and lower lows, amplifying this effect.

Nope… That didn’t play out for our theoretical Brazilian investor either. In the chart above you can see the effect of investing R$1,000 in 1995 in the Ibov index, then adding another R$1000 at the beginning of each year thereafter. In total you invested R$29,000 and in the end you now have R$203,054.98. Pretty good!

By comparison the SP500USD DOC line shows how well Dollar Cost averaging worked for a US investor, starting with $1,000 USD int he SP500, and adding $1,000 at the beginning of every year there after. The invested $29,000 and ended with $154,530,19. The returns were better for the Ibovespa investor, with does mean that when saving and using Dollar Cost Averaging, the higher volatility investment usually wins out.

However, once again the Brazilian investor, investing in the SP500 with BRL again wins out due to the exchange rate working in favor of Dollars. Looking at the SP500BRL DCA line, you see the effect of taking R$1,000, converting to dollars in 1995, investing that in the SP500, and doing the same each year thereafter. So in 1996 the Brazilian sends another R$1,000, converts to dollars, invest the amount in SP500 and so forth. The total invested is R$29,000 and the total returned is R$316,163.

Calculator?

I’ll work on a calculator for this soon so we can test various ranges of years, withdrawing, depositing, etc… I’m sure this post is quite squewed by the fact we’re only looking at 1995-2023, and different economic cycles will likely have much different results on the study here.

tl;dr

So it appears, at least since the Real Plan, the US has been the best place to invest for risk assets, for the Brazilian investor, at least for the 1995-2023 time range. This is in great part due to the exchange rate, however the Ibov returns do appear to be higher when not accounting for exchange rate risk/reward.

Let me know what you think in the comments!

-Sirsandals