Part 1 is here for those who have yet to read it. In this part (Part 2), I will share my personal circumstances and decisions while investing my CPF.
A Brief History
There are two stages in my CPF investment journey: the first one would be around the early to late 2000s period, and the second was the current stage which started sometime in 2017.
The first stage was rather bland and naïve to say the least; I was aware of this thing called CPF where 20% of my pay (and another substantial percentage portion from my employer) would go to this account where I can pay for my home loan. A meeting with a financial advisor opened my eyes on the possibility of investing my CPF (through the advisor’s funds, of course), and very soon I had invested both my Ordinary Account (OA) and Special Account (SA) (during that time the choice of funds for SA was more extensive). Among three funds or so, I could only recall the sector of one fund, which was purely in global technology. I read up the factsheet and saw it went down sharply from a high, which on hindsight was due to being pummeled by the dotcom bust. In the end, I sold off all holdings during the latter part of 2000s with some profit.
Fast forward to 2016, two milestones that year led me to the rediscovery and reopening of investing my CPF OA. The first one was the complete payment of our property mortgage via CPF, and the second was the achievement of the then prevailing full retirement sum (FRS) in my SA alone.
The Grand Plan
With these checkpoints reached, the next step of my strategy was to invest my OA both by active picking of dividend-generating counters and dollar cost averaging via buying into funds (I will share more on these in the next section) to maximize my gains and returns, once it had enough allowed for investing (we had employed early capital repayment to finish the mortgage ASAP, hence the huge drawdown). As I am still employed in a full-time job, cash is continually flowing into my OA and SA, and this meant I had enough bullets to fund my investments using OA, and in SA making use of compounding to widen the gap between what I would get eventually at age 55 and the FRS amount by then, which the figure is not out yet on the CPF website.
Bear in mind that CPF forms part of my grand plan of things which would also involve our other portfolio universes, in our so-called portfolio multiverse: the portfolios each bought using disposable income and the supplementary retirement scheme (SRS), and the potentiality of generating rental income in the future. Regarding CPF, since withdrawal is allowed after age 55, several choices could stem from here:
Withdraw Cash Above FRS*
Withdraw Investments From CPF**
Annual Withdrawal Of CPF Interest***
Liquidate CPF investments and full withdrawal above FRS
Liquidate CPF investments and partial withdrawal above FRS
Liquidate CPF investments and no withdrawal from CPF
*Withdrawal of cash to augment disposable income portfolio
**Withdrawal of CPF investments to augment disposable income portfolio
***For augmenting disposable income portfolio or as part of passive income in the event of early retirement
The choice would very much depend on the following variables:
· The financial status as at age 55
· The state of employment as at age 55
· The performances of the respective portfolios as at age 55
Clarifying further, the first point of financial status is whether we could had achieved full or partial financial independence. The second point touches on whether I am still having my full-time job or moving into a downgraded employment status, i.e., stepping down to a lesser paid (and with lesser responsibility) role. The third is how the portfolios perform as at the point of time, which is why I am implementing time diversification in my CPF investments (see here for the post on diversifying time).
With planning and strategy being determined, the next step is to operationalize them. Up till recently with all the hype on rising interest rates, cash had been a low yielding asset class in the conventional sense, but in CPF it is worth to hold it due to the higher than usual rates. Therefore, we are alright with having a huge reserve of cash even in the OA, and the minimally 2.5% can be seen as the risk-free rate to be used in comparison with other instruments.
With the above in mind, and considering the limits imposed on the amount that can be used (i.e., the 35% stock limit, professionally managed products, etc.), I had so far implemented buying dividend counters within the 35% stock limit, and funds through the professionally managed products (PMPs) route (I am currently putting on hold using the 10% gold limit).
For dividend counters, on top of them being stable companies, the prevalent yield must be at least 4% or higher to make it palatable for me to overcome the risk premium. I would keep the number of counters to maximally five, as there are quarterly charges being imposed by the banks on keeping the securities on your behalf (for mine using UOB, it is SGD 2 per counter per quarter, before GST). Since five is the cap (which I had not hit yet), I would do a periodic review (around half-yearly) of the counters and see if I could average up/down if the fundamentals are still good, or exit it if the fundamentals are getting bad and start to select/prospect for the next one.
For PMPs, I am using Endowus as it allows me the flexibility to invest my OA in a portfolio style on foreign markets more directly and carry out automatic rebalancing (a.k.a. roboinvesting). While for PMPs it is difficult to gauge the returns and yields, using historical data (though I would also like to emphasize that past performances are not indicative of future results, but I need to base on something in my assumptions), the S&P 500 had an annualized return of 12.44% for the past 10 years and 10.24% for the past 50 years1. To add, the world (using MSCI World) returned an annualized 9.44% for the past 10 years and 7.85% since 31 Dec 19872. These numbers easily beat the 2.5%, albeit with volatility built in.
As described in Part 1, each one of us is different in our views and approaches to investing using CPF funds. Here I am sharing my case, but please do not follow blindly without first giving due consideration to yours. However, I do hope my post gives you additional knowledge and maybe introduce a new facet of looking at your CPF.
1 – Aswath Damodaran, New York School of Business. Historical Returns on Stocks, Bonds and Bills: 1928 – 2022. https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html (accessed 22 Jan 2023)
2 – Index Factsheet. MSCI World Index (USD). MSCI. 30 Dec 2022. https://www.msci.com/documents/10199/178e6643-6ae6-47b9-82be-e1fc565ededb (accessed 22 Jan 2023)