Using CPF for The Bedokian Portfolio? Part 1

The Central Provident Fund (CPF) is (from the CPF website) “…a comprehensive social security system that enables working Singapore Citizens and Permanent Residents to set aside funds for retirement. It also addresses healthcare, home ownership, family protection and asset enhancement.”1 Basically it is an account to save up for your retirement, but the savings inside could also be used to pay for your housing, medical bills and investments.

I shall not go into the details on the workings of the CPF (you could find the relevant information from the CPF website at www.cpf.gov.sg), but rather on whether we could implement The Bedokian Portfolio using the CPF. Also, the account that we are focusing on is the CPF Ordinary Account (OA), although there is the CPF Special Account (SA) which provided a higher interest rate. I considered the CPF OA from the viewpoint of growing it more so that it could be deployed further in other investments (e.g. property) and/or payment of your kids’ education fees.

The first S$20,000 of the CPF OA must be set aside before it could be used for investment. Next, up to 35% and 10% of the investable savings can be used to invest in stocks and gold, respectively. You could view all these information when you log into your CPF account online.

Considerations Before Investing

The CPF OA interest rate, as well as all other CPF accounts interest rates, could be viewed as almost risk-free, which is currently at 2.5%. Although the CPF OA interest rate (and others) is subjected to a quarterly review, it has been this rate for almost the past 20 years.2  Furthermore, if you are below 55 years old, it is prudent to leave the first $20,000 of your CPF OA untouched as it earns an extra 1% interest, but this point is moot considering that you cannot touch this amount as stated in my previous section. Therefore it is important that your investments would at least beat this 2.5% amount, else it would be better off for you not to deploy the monies.

Another big consideration would be whether your CPF OA is being partially or fully tied-up in other commitments, such as home mortgage payments or your kids’ education fees. It is good that a buffer is set aside in your CPF OA for these. Personally I have had at least one year’s worth of home mortgage payments inside the CPF OA, just in case of unforetold events such as unemployment. Such things would usually come in an economic downturn and if you are fully invested, you would have to sell off your investments at depressed prices just to make ends meet.

Things To Do Before Investing

You would need to open a CPF Investment Account with either one of the three local banks (DBS, UOB and OCBC). Please note that you could only have one CPF Investment Account (no multiple CPF Investment Accounts is allowed). If you wish to change banks, you would have to liquidate your investments before initiating the closure. The banks would be able to assist you on the opening/closing procedures. Lastly, do take notice of the accompanying transaction and service charges on the use of the CPF Investment Account, which is available from the banks’ websites.

Another thing to do would be to link your brokerage account with your CPF. In this way, you could pay your securities purchases using your CPF funds instead of cash. You could find out more on this linkage from your brokerage firm.

Once these are up, you are good to go.

In the next part, I would go about on how to implement The Bedokian Portfolio with your CPF OA.

1 – Central Provident Fund Board. CPF Overview. 3 Aug 2017. https://www.cpf.gov.sg/Members/AboutUs/about-us-info/cpf-overview (accessed 15 Aug 2017)

2 – Central Provident Fund Board. CPF Interest Rates. https://www.cpf.gov.sg/Assets/common/Documents/InterestRate.pdf (accessed 27 Aug 2017)

The Bedokian Portfolio and the US Market

Over the National Day holiday I was fiddling around with an online backtesting tool at www.portfoliovisualizer.com, which I had used it for my post “Keep Calm and Ride The Waves” back in April 2017, and a thought came up; how would The Bedokian Portfolio fare in the US financial market.

Using the Balanced Bedokian Portfolio (35% equities, 35% REITs, 20% bonds, 5% gold and 5% cash), I backtested it and here are some of the findings:

• The Compound Annual Growth Rate (CAGR) for the period of 1994 to 2016 was 8.66%.

• If US$10,000 were invested in January 2001, with annual rebalancing, it would return US$33,824 (not adjusted for inflation) by December 2016.

• If the 20% bond component were made up of US Long Term Treasuries, it would return slightly more than an all-equity portfolio (US$61 more) for the period of 2007 to 2016.

For more returns (and risk) results, download the paper “The Bedokian Portfolio and the US Market” here for free.

Ceteris Paribus

If it sounds Latin to you, yes it is. In English the term ceteris paribus is “other things equal”, meaning in an experiment or observation setting where the relationship between two variables or factors are studied, all others are taken as constant or unchanged.

Ceteris paribus is often used in economic studies, where analysis of cause and effect between two variables in a given situation is carried out to give a result in the absence of other variables. Though in the real world there are many factors at play to produce a given market or economic situation, ceteris paribus could at least provide a basic assumption at the lowest level.

Demand and Supply Example

For example, using one of the basic economic models, the law of demand, where the variables price and quantity of let’s say, apples, are studied, from the consumer point of view, the demand for the quantity of apples will go down when their price increases.

Using another basic economic model, the law of supply, with the same variables of price and quantity of apples but from a supplier’s viewpoint, the quantity of the apples will increase when their price goes up.

Combine these two, and you will get the demand-supply graph of apples, ceteris paribus. Since it is ceteris paribus, other items (such as oranges, bananas, grapes, etc), which may have an impact on the demand and supply of apples, are not taken into account in this whole analysis.

Use in Fundamental Analysis

For The Bedokian Portfolio fundamental analysis (FA) style, the implementation of ceteris paribus can be used at the environmental factors and economic conditions level, where more assumptions are required as compared to financial statement analysis at the company level. Remember in carrying out the assumptions, the most straightforward and simplest explanation is to be considered first. Taking the telco sector for instance, a fourth telco operator to the status quo would mean more competition in the sector, ceteris paribus. Or for the case of interest rates, their rise would bring inflation down, ceteris paribus.

The ceteris paribus is just the beginning in the whole scheme of things in FA. A lot of assumptions and scenarios would have to be placed together to form a more coherent picture, but then again this would be subjective. This would probably explain why analysts and economists have different opinions and interpretations on the state of the financial markets and the economy, even though they could be working on the same set of information.