Investing Your Supplementary Retirement Scheme Account?

Supplementary Retirement Scheme, or SRS for short, was introduced in 2001 and it is part of the Singapore Government’s multi-pronged strategy to address the financial needs of a greying population. It is a voluntary scheme that complements the Central Provident Fund (CPF). Thus, the SRS forms part of the basic make-up of our portfolio multiverse structure, along with the CPF and investment portfolio using disposable income. 

Besides saving for retirement, the monies that go into the SRS account are eligible for tax relief, so there may be some tax savings depending on the total relief amount and income bracket of the individual. The contribution limit for Singapore Citizens and Permanent Residents is SGD 15,300 and SGD 35,700 for foreigners per calendar year, and that means the deadline for the contribution is on or before 31 December.

 

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Should I Open An SRS Account?

Before jumping into the how of investing in one’s SRS, we need to address the why first, and honestly there is no correct answer. In my view, if you have some spare cash lying around and want to reduce your tax bill, why not start it? 

Granted that the spare cash can be deployed into your disposable income portfolio, but that does not bring down your tax payable. Similarly, you may have maxed out your CPF contribution limit and still have some more headroom to the SGD 80,000 personal income tax relief cap. If you had hit both aforementioned conditions, then the case for opening an SRS account is stronger.

Even then, if you had not hit those conditions, you could still open an SRS account, like my case; I want to reduce my tax payable, so I just contribute to it. When I started my SRS, my CPF SA had already hit the prevailing full retirement sum for some time, so any further topping up via voluntary contribution does not invite tax relief. Also, I view SRS as a form of forced savings from which I have a stash of funds by age 62 (for me. Now is 63).

 

Investing Your SRS

If left uninvested, the funds in the SRS earn 0.05% per annum based on the latest information available, which is akin to a typical savings account. From an investment viewpoint, that yield hardly compensates for the inflation rate, hence investing it is a no-brainer option.

Unlike CPF where there are limited investable amounts and choices, you can plonk in the entire SRS into various financial instruments (shares, bonds, exchange traded funds, unit trusts, etc.), endowment annuity plans, bank fixed deposits and bank structured deposits. As with any investment decision, the choice of what to invest in depends on your product preferences and familiarity, risk appetite and tolerance. You can have more than one type of product within your SRS, for it is in itself, a portfolio universe.

 

Open Your SRS

If you have yet to open an SRS account, it is advisable to do so as soon as possible. The official retirement age in Singapore is set to go higher at 64 after 1 July 2026¹. Opening the SRS account would “lock” the withdrawable age at the prevailing retirement age, i.e. if you open now, you are able to start drawing down your SRS account from age 63, regardless of what is the prevailing retirement age when you reach 63. You can have only one SRS account, and you can open your SRS account with either DBS, OCBC or UOB.

 

Bonus Paragraph: What Is Inside The Bedokian’s SRS?

Now I am doing a regular contribution to a robo-advisory portfolio consisting of 60/40 fixed income/equities make-up, with an annualized internal rate of return of 9.48% so far. As I do not invest the whole works and have spare funds inside, I may deploy the balance in individual securities. 

Disclaimer

Reference

Supplementary Retirement Scheme. Ministry of Finance. 7 Dec 2017. https://www.mof.gov.sg/docs/default-source/default-document-library/schemes/individuals/supplementary-retirement-scheme/srs_booklet---7-dec-2017e42cafd2dab847f78b5cfb6919b476b2.pdf  (accessed 20 Oct 2024)

 

1 – Boo, Krist. S’pore retirement age to go up to 64 in 2026, re-employment age to rise to 69. The Straits Times. 6 Mar 2024. https://www.straitstimes.com/singapore/politics/s-pore-retirement-age-to-go-up-to-64-in-2026-re-employment-age-to-rise-to-69 (accessed 20 Oct 2024)

Know This, And You Are Halfway Knowing How The Market Works

I admit that the title of this post sounds like a click bait, but it is mostly true, at least based on my observations and conclusions.  In a way I had somehow stumbled upon a hypothesis that works most of the time.

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So, what is this wondrous hypothesis that could half answer how the markets work?

It goes like this:

Capital, assumed it is limited at the point of time, would either flow to assets that provide the most deemed yield, or to perceived safe assets, or both.

In layman speak, it would be:

Capital would go to securities that provide “more bang for the buck” and/or to a perceived safe haven.

If you had been reading my blog for at least the past three years, you may find the second italicized quote familiar; I had mentioned something along that line in this post, where I also emphasized on the importance of diversification. However, we can apply more from this hypothesis besides just diversification, and the accompanying trait of rebalancing. One way is to go contrarian.

 

Going Contrarian

The good thing about this hypothesis is that you can counter its logic and still profit from it. This is known as “going contrarian”.

When capital starts to move fast and huge, like a flash flood, you will notice big movements in the prices of assets and securities. As a retail investor, when these things are happening, it may be a bit late as other people would have jumped on the bandwagon before you, although maybe you are lucky enough to be at the tail end of it. The contrarian part is, since most are going with the metaphorical wave, why not go against it?

The thing about going contrarian is not to do it wholesale and blindly; it is important to pick the right ones and capitalise on it. For instance, if you are an active investor who goes for individual equities and real estate investment trust (REIT) counters, picking those that were financially healthy but got unfortunately dragged down by the overall bear situation was a good case of going contrarian intelligently. 

Though the contrarian way sounds like an act of portfolio rebalancing, which is long term in nature, it could also be used in medium term or short trading terms, too. 

Going The Way Of The Dodo

As an investor, whether going for growth or dividends, we like to own companies that are near-monopolistic, or at least having a wide moat, as they are seen to be financially stable and strong given their steady or growing user base of their products and services. However, due to some poor management decisions and foresight, a great company may devolve into good, then bad, and then gone, either being bought over by someone (partially or fully) or doing business in some other fields. There are a few classic examples of these companies; the oft-reported stories would be Kodak and Nokia, where they had lost their dominance in their main products.

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While it is easy to point out the causes of past declines due to hindsight, at present we do not know if a company and/or its product and/or service is facing obsolescence. While there are many potentials out there now, sometimes a change in management team, product or service range, or “white knight” investors, may save the situation.

The Bedokian’s View

As mentioned, it is not easy to identify such companies especially when things are still in a flux. The good thing is, except for companies that engage in financial fraud and/or suffering from a huge unmitigated public relations disaster, this decay generally would take several months to years to develop, so observant investors could see the writings on the wall and get the hint that it is time to say farewell.

The first thing an investor must know is not to fall in love with any counter, and not to harbour any hope given the known not-so-good circumstances surrounding the company. Love and hope, though good attributes in a personal sense, are not to be brought into investing, where staying objective and rationale is key.

Next up, we shall look at the numbers, in particular revenue and free cash flow. A profitable company would minimally have a slight growth in revenue and a not-so-volatile free cash flow. There are other metrics such as return on investment (ROI) and return on equity (ROE), but these are sector/industrial specific and cannot be applied in general. Though typically I tend to look at over two to three years, if the situation deteriorates faster than it should be, then I may set up an exit sooner.

As for how to tell whether the company is getting worse in a short time, I would look at what I call trends and fads (mentioned here). Though this method of mine is to look out for the next big (profitable) thing, it could be adapted for use in guesstimating negative outcomes.

The final word here is that, even after a thorough analysis conducted and yet you still feel queasy on a counter (that unexplainable “gut feel”), then prudently it is better to just let it go. Having a good sleep is good for your physical and mental health.

Macroeconomic Lessons To Learn From The Past Two Years

Due in part to the spike in demand and limited supply of products in the aftermath of COVID-19, and a host of other reasons such as geopolitical ones (e.g. Russian-Ukrainian conflict) and the long period of low interest rates which flushed the economy with cheap-loan capital, caused inflation to rear its ugly head. The subsequent accelerated rise of interest rates that was never seen before since the mid-2000s had brought an unprecedented economic environment in which most younger investors had not experienced before.

The past two years or so had provided useful insights and learning opportunities for us investors, and that is attributed to one macroeconomic policy: interest rates. What I would be sharing in the next few paragraphs are theoretical knowledge found in economics and finance textbooks, and most of the occurrences did happen, thus giving a sort of “classic textbook examples”.

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Inflation And Interest Rates

When inflation is perceived to be happening, countries whose central banks can control interest rates (like the United States or U.S.) would raise them to bring inflation down. The rationale behind this is that when interest rates go up, the cost of borrowing would go up, and this slows down capital investments by companies as loans are getting expensive. Simultaneously, for consumers, higher rates meant higher returns from safe instruments such as short-term treasuries and bank deposits, which in turn encourages saving and less spending. All these cool down the economy and lower inflation.

For Singapore, instead of interest rates, our central bank (Monetary Authority of Singapore, MAS) used the exchange rate policy to manage the monetary policy. However, it is noted that our interest rates are very closely correlated with that of the U.S.’ in terms of direction and movement (see here and here for further explanations).

Effects On Asset Classes

Now that you got the gist from the previous paragraph, you could roughly tell what are the asset classes affected by high interest rates. Positively, as mentioned, are cash (in banks and money market funds) and short-term treasuries (less than two years). Negative ones include real estate investment trusts, or REITs (being leveraged investment vehicles, higher rates affect distributions to REIT unitholders), bonds (interest rates and bonds are inversely correlated) and lastly, commodities (which do not provide yield). For equities, though the cost of borrowing may affect the growth of companies, for some sectors such as finance (banks) and technology, as well as cash-rich companies, enjoyed some boom time.

True enough to a certain extent, we saw that REITs were hammered, a lot of people flocking to erstwhile boring treasury bills and fixed deposits, and gold was somehow muted throughout 2022 and 2023, to name a few.

Everything Is A Cycle

Good times do not last, and so are bad ones. All markets and economies go through a cycle, from bust to boom to bust to boom again. Now that the U.S. Federal Reserve had brought down rates, with more planned ahead, we could see treasury bill yields going down, REITs roaring back up, gold surging ahead, etc. The undulating nature of the market and economy, and the behaviours of the asset classes during these cycles, proved the importance of having a diversified portfolio with periodic rebalancing. With diversification and rebalancing, your investment portfolio can be protected from huge downswings and capital losses can be lessened. 

Ceteris Paribus

Last but not least, all economic scenarios and assumptions are accompanied by the term ceteris paribus, which translated from Latin is “all things being equal” (read here for more information). As we know, the economy is like a machine with many moving parts, working and affecting one another at the same time (read here for the economic machine analogy). Thus, even though we can observe “textbook examples” happening, sometimes it may not go according to theory, or even so, it might be other factors at play to give it a “textbook answer”.

Still, in my view, it is better to have some basic economic and financial knowledge to get a grasp of the complicated, yet simple, world of investing.