2024-05-03 18:35:33
The dollarization of assets is usually a strategy adopted in the financial planning of those looking for alternatives in the investment market.
In this article, you will be presented with what it means to dollarize your assets and the positive and negative points of this practice.
Furthermore, at the end, you will learn about the ways that exist to migrate your assets to American currency.
What is asset dollarization?
Dollarization occurs when investors convert part of their investments from the real to the dollar. By dollarizing your assets, your investment portfolio will be linked to the currency of the United States, the largest economy in the world, opening up a range of investment and diversification options for the investor.
Why dollarize assets?
Many investors opt for dollarization as a form of local risk protection.
After all, the dollar is a stronger currency than the real.
Historically, the real was only valued more than the American currency in the period between 1994 and 1999, when US$1 was traded at R$0.82, the lowest price in history.
At the time, the Brazilian government controlled the exchange rate of the dollar, seeking to stabilize the country’s economy in a context of hyperinflation.
After this period, the dollar exchange rate stopped being controlled and the currency returned to a higher level than the real.
And it remains today.
In 2023 alone, Brazilian investments abroad increased by 12% compared to what had been invested in 2022. Last year, Brazilians sent more than US$45 billion to their international accounts.
In addition to the protection involved in this process, different reasons lead investors to invest part of their assets in the dollar.
Let’s get to know some:
Exchange rate protection
As previously stated, the dollar has always been stronger than the Brazilian real. This means that the US currency tends to suffer less from exchange rate fluctuations that affect reality.
This strength relationship between currencies is something that investors need to keep an eye on. Generally, what depreciates in relation to another is the real, not the dollar.
Therefore, when you come across news that the dollar has become cheaper or more expensive, most of the time it is because the real has appreciated or depreciated, and not the other way around.
Economic uncertainties
Political and economic instabilities are common in developing countries, such as Brazil. This local uncertainty directly impacts how volatile the currency can be.
On the other hand, the United States is the largest economy in the world. This security in the country makes the dollar one of the safest currencies to invest in.
And that is why, in the comparison between the dollar and the real, the vast majority of the time, the dollar wins.
What are the positive points of asset dollarization?
Exchange rate protection, diversification and economic uncertainties that directly affect the real are some of the reasons that lead investors to dollarize their assets.
When opting for an international investment linked to the dollar, the investor accesses a series of advantages that he would not be able to obtain when investing only in the Brazilian market.
Discover some of them:
Protection against inflation and fluctuations in Brazil
Unlike the real, the dollar tends to be more stable and suffer less from inflation.
In fact, the variation in the dollar directly impacts price dynamics in Brazil.
When the dollar appreciates, products priced in dollars, especially imported ones, become more expensive when converted to the real, directly impacting the Brazilian consumer’s pocket.
Therefore, dollarizing assets can be a way for investors who seek to protect themselves from the effects of the index and keep their purchasing power intact.
Store of value
Many assets are seen as a store of value option by investors who seek to protect themselves from market fluctuations over time.
Gold, real estate and also the dollar appear as some of the alternatives.
To give you an idea, 60% of global reserves are currently allocated in dollars.
In Brazil, this number increases. 80% of national reserves are linked to the American currency, according to the Central Bank International Reserve Management Report March 2024.
Access to global markets
Brazil does not currently represent 1% of global assets.
By opting for dollarization, you now have even more asset options for your investment portfolio, such as fixed income and the North American stock market.
Developed countries, such as the USA, offer investors more investment options than Brazil.
For comparison purposes, the United States stock exchanges have around 6 thousand listed companies, while the Brazilian stock exchange has just over 400.
Furthermore, by dollarizing your assets, you have the possibility of also investing them in other world economies, such as European countries, for example.
This possibility occurs because the vast majority of international investments can be made in dollars. After all, we are talking about the strongest currency in the world.
Diversification
Although Brazilian investors can diversify their investments with Brazilian assets, it is important to remember that the country’s investments are correlated.
Even though Brazil offers good investment opportunities, the market is still emerging and sensitive to several factors, both internal and external.
Therefore, diversification into other currencies can bring more protection to your portfolio in times of volatility.
One of the solutions to minimize the effect of Brazil Risk on portfolios is through investments abroad.
Earning Potential
Linking your investments to the dollar is also a way to maximize your gains.
You will be investing in the strongest currency in the world and any appreciation in its value will be positive for your portfolio. Furthermore, in the event of a devaluation of the Brazilian currency, part of your investments will be protected.
And even in these moments of decline, like those of the Brazilian stock market, for example, you can end up benefiting. After all, your assets will not be directly related to the dynamics of the Brazilian economy.
Ease of transactions
You know that trip to Disney with the kids, or the international purchase that can only be paid in dollars?
Your life can be made easier in these moments.
By dollarizing part of your assets, you will probably have already purchased the currency in advance and will be able to plan your trip or purchase with more peace of mind.
What are the negative points of asset dollarization?
We present to you a series of reasons to choose to dollarize part of your assets. However, there are some issues that investors need to be aware of to avoid falling into traps when dollarizing.
Discover some of them:
Transaction costs
The process of converting the real into dollars, or vice versa, usually generates costs for the investor, such as Tax on Financial Operations (IOF) and exchange rates.
Therefore, it is important to check all the costs involved to assess whether it makes sense for you to migrate to the dollar.
Depending on the alternative chosen for dollarization and the value applied, the process may not be very beneficial in some cases.
It is worth remembering that the dollar used by individuals is the tourism dollar, different from the commercial dollar commonly used in transactions between countries.
The price of the tourism dollar is generally higher than that of the commercial dollar, generating an additional cost for investors who are thinking about dollarizing their assets.
Taxation
Depending on the country’s tax legislation, investing in assets abroad can generate some complexities throughout the process.
Furthermore, taxation tends to be different for assets abroad and the lack of tax planning makes the process even more difficult.
You can understand more about international taxation and how it affects your assets in our article.
Market fluctuations
Whether your risk profile is conservative, moderate or bold, you need to keep in mind that, although the dollar is considered a safe currency, it also goes through fluctuations.
These fluctuations are generally smaller compared to the real, but the possibility exists and must be taken into account by the investor.
If you feel that you are not prepared to face the ups and downs of the market, or prefer to expose yourself to less risk, dollarizing may not be a good option for you.
Account opening
When dealing with dollarization, you will probably need to open an account abroad.
In some cases, the structure of investments abroad can be complex and generate additional costs.
Therefore, it is important to seek the help of a professional so that the process is carried out in a way that is not burdensome for you.
How to dollarize your money?
There are different ways for you to dollarize your assets.
You don’t necessarily need to buy the dollar in cash. The act of purchasing it as a way of dollarizing your investments has even more costs involved in the process, such as exchange rates and the Tax on Financial Operations (IOF).
Furthermore, if you choose to have dollars in cash, you will be missing opportunities to make your money work, as its value could be eroded by inflation over time.
Therefore, you must pay attention to the options that exist on the market.
Alternatives include international investment funds, ETFs, BDRs, International Managed Portfolios or direct investment in the country – in this case, you would need to open an international account at a bank abroad.
But before jumping into investments, you need to pay attention to the fees involved, the risks you are willing to take and whether this type of investment is aligned with your short and long-term financial objectives.
How to dollarize your money at Warren?
Now that you understand what dollarization is and how to dollarize your assets, you will learn about the advantages of dollarizing your assets with Warren.
Today we have a unique solution on the market: managed international portfolios.
We currently provide portfolios with international investments for individuals and legal entities (offshore).
With our portfolios, you won’t need to waste time updating yourself on the financial market in search of the best global assets to make your money work.
Our experts do this for you.
Through active management, your portfolio always reflects the best opportunities on the market.
Each portfolio is offered to you considering your risk profile, desired term and liquidity.
Additionally, Warren’s international portfolios are made up of ETFs held in Ireland, an investment option that reduces taxes for foreign investors.
Discover the advantages of investing:
- Inheritance tax benefit: Inheritance taxation in the United States can reach up to 40% of the estate. In most cases, Irish ETFs are exempt.
- Savings on taxation on dividends: In the US, the dividends you receive are taxed at 30%. Taxation for those who invest through Irish ETFs falls by half, remaining at 15%.
- Accumulation class: Accumulation ETFs are investments whose dividends are automatically reinvested. This way, the Investor will only pay taxes when the assets are sold.
- Simplicity to declare in Brazil: Since they are accumulation ETFs, you do not need to declare the dividends received in your portfolio. The investor must only declare the appreciation of this share of the investments made.
Do you want to know more about this unique solution to dollarize your or your company’s assets? Register and talk to our experts.
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