Note: This article is not investment advice; it is just an account of my journey so far.

After building an emergency fund, the next step is to diversify your investments. In this age of information overload, with so many investment options (and people offering products, assets, and courses), here is a bit about the path I have taken so far.

Real estate

“When you get married, you want a home”: a simple phrase and the purest truth. When you get married, the first thing you want is a place to live and share the day-to-day with the person you chose to spend your life with. But the investor’s first question soon comes up…

Buy or rent?

Aside from all the financial analysis of whether renting or buying makes more sense, if neither you nor your spouse owns a property, I think buying is entirely reasonable. To me, a home is about more than whether it is financially “better or worse”; it is a matter of security. A property in your name is certainly illiquid, but that can be an advantage: it makes you less likely to do something reckless, make a bad decision, and end up without a home.

If you are single, put off that decision. Maybe you want to settle in another city, state, or country, or live as a nomad. There is nothing wrong with that. I just think that for people with a spouse and/or children, security is worth more than a few extra percentage points on the CDI.

Back to the financial analysis: renting is almost always better than buying. There are exceptions: buying a pre-construction property from a trustworthy builder or developer; getting a fixed-rate mortgage below the period’s inflation or SELIC rate; buying at auction with cash and renovating; or investing in rural land that will become urbanized. These options can make buying a great investment, even after accounting for depreciation and fees.

Cars

At 19, I bought my first brand-new motorcycle and sold it nine years later for the same cash price I had paid (there is inflation for you). I only sold it because of the COVID pandemic: my life changed with remote work, and I no longer needed to commute to the office every day. A motorcycle is incredibly economical, easy to park, and saves time. The downsides? Rain, cold, and physical safety.

A car is still a necessity in my day-to-day life, even more so after I sold the motorcycle. Here is a tip: according to the bathtub curve, the sweet spot for buying a used car is between 3 and 7 years old. Buy around then, and you should be able to keep it for another 10 years without much trouble. After that, maintenance problems start showing up more often. Of course, all of this depends on how much you drive and whether you keep up with maintenance.

I have bought much older cars, 15 to 20 years old, haha (miss you, little Palio from 1997). First, I was still learning to drive, so a bump did not hurt as much financially or emotionally. Second, I wanted to pay cash and skip insurance, so I was willing to take several risks in exchange for savings.

Risks

Living means taking risks. You should be aware of the risks you take every day when you leave home, but not let them paralyze you. Things will happen, good and bad. If you want to reduce the risk, you have to pay for it!

“I’m afraid of getting hurt on a motorcycle”: buy a car. \($ *"I'm afraid my car will be stolen"*: pay for insurance.\)$

When I bought my cars without insurance, I reduced the risk by putting a security camera in front of my house. I live in a gated community now, so I feel more at ease. Of course, I am still vulnerable when I leave home, but it is a risk I am willing to take given the car’s value and age. If you buy a car in that sweet spot, it will cost more and may be above your means; in that case, insurance is worth considering, especially if it costs less than 10% of the car’s market value.

Update, 2024-10-09: I bought a newer car and got insurance. 👍

Investing

All right, you have a way to get around (or not), you have a home (or not), and now you have some money left to invest. Where do you start?

Emergency fund

Any liquid fixed-income investment that yields at least 100% of the CDI. Tesouro Selic works well here: no stress, no need to get fancy. The amount should cover 6 to 12 months of your net salary.

Knowledge

Do not invest in what you do not understand. Knowledge is the one asset that cannot be confiscated. So invest in yourself: take courses on YouTube and study.

Diversify

Do not put all your eggs in one basket. Diversification protects you from your own ignorance. You cannot predict the future or know everything all the time.

Do not spread yourself too thin

At first, put a little of your reserve into the asset you are learning about. Once you gain confidence and see that the asset is good, increase your position. Here is a rule of MINE; use it and change it if you find it useful. To avoid spreading my portfolio too thin or concentrating it too much, I set a floor and a ceiling for my investments.

Limit the number of assets

The ceiling is 20% and the floor is 5%; every asset in my portfolio should fit within that range. For example, 20% of my portfolio could be indexed to the IPCA plus some rate, so I earn a real return above inflation. Within that 20%, I could hold several assets: LCI, LCA, CRI, CRA, Tesouro IPCA, and so on, as long as the total stays under 20%. Another case: I want 5% in stock ABCD3 (for example), so I could hold 2.5% in ABCD3 and 2.5% in ABCD4, keeping the total within the 5% limit. That would give me between 5 and 20 investment strategies in my portfolio.

Update, 2024-10-09: I still agree with not spreading investments too thin. I just think this became less relevant once I decided to hold no more than three assets. I will say more about that below.

Fixed income

I like Cerbasi’s strategy of allocating a percentage to fixed income based on your age plus some amount. In my case, I use 30 + 10 = 40%. In the end, I follow the old 60/40 portfolio mantra: 60% variable income and 40% fixed income. Of course, it varies from person to person, but I am comfortable with this allocation.

Stocks or ETFs

There are several options for variable income: REITs, stocks, ETFs, and so on. Following the ideas of JL Collins, Buffett, and John Bogle, I think ETFs are a great way to get exposure to variable income. Of the 60% in variable income, 40% (two-thirds) is in ETFs. I like using the other 20% to bet (yes, bet; if you really want to invest, stick with the ETF) on good companies with good management and a diversified portfolio. I also hold some REITs; I like the monthly income and the pseudo-rent. It has a very good psychological effect.

Update, 2024-10-09: Following this approach, I now see two ETFs that could sum up this entire investment strategy: IMAB11, which tracks Brazil’s long-term interest rates while protecting against inflation, and IVVB11, which tracks the S&P 500 and the world’s largest companies. The famous bonds and stocks, in a new version. Each person can decide what percentages feel comfortable.

The third could be an infrastructure, agriculture, or real estate REIT, for those who find it psychologically comforting to receive a monthly dividend. Maybe even an NDIV11.

Private pension

Update, 2023-03-28

I have been investing more in private pensions lately because, as I have explained, the main goal of my investments is not to get rich; it is to achieve a degree of financial independence.

The tax incentive currently available through PGBL is very interesting and underused, as long as you find a fund with a good manager and low fees.

It was funny: I started looking into it and basically found a fund that “replicated” my portfolio at the time in terms of assets and allocation. I decided to move over gradually, so I could benefit from the tax treatment and feel more at ease because of the low liquidity of this kind of investment.

Psychology

Many people get lost in the calculations when investing: which security yields more? Which has less volatility? And so on. People talk little about the psychological side, beyond not selling low and buying high. Money (this is the first time I use that word in the article) has a very strong psychological effect on people. Having none of it causes frustration, sadness, and arguments; having too much can cause fear, greed, and resentment.

I like the idea of owning a home for the psychological security it brings. I like the idea of REITs with monthly payouts for the positive reinforcement they give investors. They may not be as financially effective, but in my case they work psychologically. Investments can affect your well-being if you let them, and my goal has always been to invest in a way that lets me sleep.

Sleep

Resting your head on the pillow and falling asleep without worrying about an asset’s fluctuations, knowing your portfolio is well protected and that market fluctuations do not matter: to me, that is the goal of building a portfolio and investing.

If you do not know some of the names mentioned here, look them up, research, and study. But remember that the only way to actually get rich is… work.

Work

Here is the secret to getting rich: work. Forget the stock market; it is hard to get rich from it, and you are more likely to get gastritis along the way. Naval explains it better on the How to Get Rich podcast and sums it up in one sentence:

“Apply specific knowledge with leverage.”

Even so, work and study are the only ways to do that. So if investing is not part of your job, do not spend too much time on it. Spend your time learning things that will make you better as a professional, entrepreneur, or person.

See you.