As a result of social improvements in health, hygiene and nutrition, life expectancy in Mexico has risen from 57 years in 1960, to 67 in 1980, and 75 in 2020. With this notable increase in longevity, we are not only experiencing more age-related diseases, but it also puts stress on our financial situation as individuals.
As we age, we still have the opportunity to learn, but our skills, competencies and interest in earning diminish. Therefore, we must each be the protagonists of our health, including our financial health.
Even if we have contributed to a pension plan throughout our lives, in order to achieve financial health we must simultaneously build wealth with active savings. From 2012 to 2018, the proportion of the adult population that saved actively grew from 51% to 68%, according to the National Banking and Securities Commission, with data from 2021. Having enough cash always provides resilience and flexibility, allowing us to fund strategies, focus on building a future, cope with unforeseen expenses, enjoy small luxuries, and take advantage of opportunities.
It is important to remember that financial markets channel funds, services and risks between those who have a surplus and those who have a deficit. These markets define, among other things, the interest rate at different terms, which is the price for using other people’s money.
One option is to invest in different types of sovereign bonds. In Mexico, CETES are zero-coupon bonds that mature in under a year and each bond will always pay $100 pesos at maturity. M Bonds are sovereign bonds that pay a fixed coupon every 182 days, and the nominal value is paid on the maturity date. BONDES D and BONDES F pay a variable coupon each time, based on a reference, and at maturity pay 100% of their nominal value. UDIBONOS pay a fixed coupon in UDIs each period and will pay 100 UDIs at maturity. UMS are dollar-denominated Mexican government bonds, and pay a fixed coupon in dollars plus their face value at maturity.
There are other bonds issued by certain federal agencies, backed by the Federal Government, such as the IPAB bonds. However, there are other federal agencies that issue debt that is NOT backed by the Federal Government, such as CFE (Federal Electricity Commission) and Pemex. Subnational governments (states and municipalities) also issue debt and the conditions and fulfillment guarantees should be reviewed for each instrument. The rates of return offered by sovereign bonds at different remaining maturities (TENOR) comprise the basis of the price of money in a country and form the yield curve.
Another level of debt for investing is corporate debt, issued by banks and companies. This debt may have different structures and performance guarantees, as well as different repayment promises. The implicit risk between debt from different banks or different companies is not stable.
Real estate is another option. It can be acquired privately or through public instruments. Public instruments such as FIBRAS/REITs offer advantages in liquidity, as well as diversification with respect to the private acquisition of assets. Investing in public real estate instruments requires reviewing the strategy, the quality of governance, and the administration costs that are paid.
Other types of assets include company stocks, brokered funds, and ETFs for indices, sectors, regions, or countries. You can also invest in non-traditional assets such as private equity funds, hedge funds, commodities, etc. A thorough analysis of investment alternatives is always required and, in general, funds should never be concentrated in a single or just a few types of assets.
According to financial theory, higher-risk instruments should offer a higher return. In long term instruments, this argument is generally valid, but in short term ones, sovereign debt offers more security. Although investing in bonds has a low level of credit risk, their market value can change according to interest rates. Therefore, in times of rising rates, the duration of the portfolio must be reduced and increased in times of falling rates. The concept of fixed income may become meaningless in today's markets, as inflation and principal denomination is now a relevant issue.
Since the right portfolio for an investor depends on his or her investment horizon, appetite for risk, and personal interests and restrictions, it must be custom designed, operated and evaluated.
In conclusion, even if people develop the rights to a defined benefit pension, it is advisable to save in a disciplined manner and build a diversified, productive investment portfolio that beats inflation and permeates the ethics of life, prioritizing the important over the superfluous, happiness over misery, as well as a savings culture in those around them.
The author is professor of Finance at EGADE Business School.
Article originally published in Alto Nivel.
