Note: This book (“Investimentos Inteligentes” by Gustavo Cerbasi) does not have an official English translation and heavily references the Brazilian financial market. However, its core concepts on asset allocation, rationality, and systemic rebalancing are universal.

The fourth book covers how to allocate the money left over after the previous readings.

If I were to summarize it: the good investor must act with rationality and invest in what they know and understand.

Every investment needs attention; simply holding it in a portfolio is not enough.

The Mechanics of Rebalancing

The financial market tests our patience daily. Long periods of prosperity also call for attention.

According to the author, it is important to take profits and rebalance the portfolio when one investment yields much more than the others and concentrates too much risk. Rebalancing rules help keep market emotion out of the decision.

The Math of Choice: Fixed Income and Stocks

Cerbasi makes a few points about asset efficiency:

• The trap of Funds vs. CDBs (Certificates of Deposit): Investment funds often have semi-annual tax collections (known in Brazil as come-cotas), while CDBs are only taxed upon redemption or at the end of the contract. For larger contributions, the CDB allows the “unbitten” money to continue generating compound interest more efficiently.
• Stocks and the P/E Ratio: Those who invest in stocks should focus on the continuity of the company’s profits, reading the business reports instead of worrying about the daily fluctuations of the home broker. The Price/Earnings (P/E) ratio measures in how many years you will receive what you invested. Mature companies operate with a P/E between 6 and 10. Below 5, they are generally great opportunities; above 10, they are expensive.
• Focus and Limit: Do not invest in more than 10 to 12 different companies. Diversify sectors, mixing “value companies” (greater stability and dividend distribution) with “growth companies” (which retain profits to expand), but keep a number that you are humanly capable of tracking.

Professional protection

The book also offers a reflection that goes beyond the stock market:

“Whoever grows in their career already building a second alternative career is, by far, with much greater inner peace than someone who focuses completely on a single position.”

Having options helps in a crisis. Diversification can also mean investing in human capital. Hours of study for a career transition work as a hedge for your main professional life.

Life goals

Money is only useful if it is aligned with your life planning. For me, the goals are clear: the short term finances the routine and small recharge trips; the medium term allows for deeper explorations around the world; and the long term must guarantee the mathematical conditions for these goals to continue being executed, even if I live past 100 years.

As the book warns: “Investing is nothing if you don’t know what to do with the harvest.”

Establish your allocation rules before investing. Write these rules down and be faithful to them.