Friday, May 29, 2020

The Economic Machine Analogy, Dimension And Degree

I like to use the analogy of the economy as a huge, 3-dimensional machine with billions or trillions of parts working together, something like a complex system of gears and rods of various sizes moving it along. The parts are made up of anything and everything that is related to the economy; countries, industries, businesses, mom-and-pop shops and individuals like you and me. It can endure some kinks here and there, and the machine itself is dynamic whereby if some parts are damaged or gone, it will tune itself to suit the current situation. The economic machine would require one important item that enables it to run smoothly, and it is a lubricant called liquidity. The lubricant oils the machine at many different points, and in turn cascades down to other parts, like a champagne pyramid.

The global crash of 2008/2009 was a liquidity crisis, during which there was not enough lubricant to oil the entire machine, due to being leaked off somewhere (e.g. sub-prime bubble). The subsequent “friction” caused some parts to be damaged, and consequentially affected other parts, too, on a wide scale. The introduction of quantitative easing, reduction of interest rates and other fiscal and monetary measures brought the much-needed lubricant back to restart the machine engine.

In the COVID-19 situation, to put it simply, the machine had simply stopped due to the lack of demand and supply in some quarters, mostly attributed to guidelines and regulations of curbing the spread of the virus through lockdowns or other means. This stop is causing other parts to either slow down or halt, too, and if this scenario persists, it does not bode well for the machine. Governmental responses include the tested-and-tried lowering of interest rates, easing of credit crunches and loan payment deferments, payouts to affected individuals, etc. These initiatives are at least trying to make the parts move at its minimum acceptable speed. 

Dimension And Degree

I would like to introduce the concept of the double Ds and they are dimension and degree. It is a very useful framework especially if you are an active investor and adhere to the associative investing idea (mentioned here).

Dimension is the way on how and where you look at things, and sometimes they look different if you viewed them from different locations; e.g. the number ‘6’ looks like a ‘9’ if you stand the other side, and the scenery seen from your bus/car/train while going to work is not the same as the one when you are coming back home. If we equate the economic machine as a car, you can see the car doors from the side, not from the front, but you can see the headlights and the doors if you stand in between the front and side. Seeing things from different dimensions enables you to have different perspectives, and with them your decision making would be clearer.

Degree is how far you are looking at from the point of origin, and it is also important when you are looking at the markets and economy. Going back to the machine, if a part moves, others will move, too. However, the move does not go in a linear fashion, but instead all around as long as there are links in between (remember, it is a 3D machine). It is like tracing your family tree, where most people would just go up to their parents, then grandparents, and so on, in a line. A more thorough method is to branch out your other family members, like your uncles, aunts, cousins or even their in-laws. I understand that it is exhaustive to go that far and you may lose your focus, so stop at a level where it is deemed not to have an adverse impact on your original prospect.

Guesstimate, a term which I like to use in my analysis, is an estimated guess to “see” the future, using known information and knowledge at your disposal to have a sense of what are the possible outcomes. Using the dimension and degree context mentioned above, you can have a hunch on what would be the market direction and the state of the economy, and/or knowing the upcoming growth areas and trends, by imagining the movements of the machine parts and see how it goes from different angles. Though we cannot really tell what is in store for us, a guesstimate is much preferred over a wild stab-in-the-dark guess.

There are some tools on how to visualise all these dimensions and degrees, but first thing is to get some papers and pens or markers. Mind maps, SWOT (Strengths, Weaknesses, Opportunities, Threats) matrices and Michael Porter’s Five Forces are some of the tools you can use, along with thought processes such as lateral and contrarian thinking which might help to give fresh insights on your analysis. In all aspects, having an open mind is key.

Thursday, May 21, 2020

Investing My CPF With Endowus

This is an affiliated post with Endowus. All views, opinions and research expressed herewith are solely mine. The intended audience of this post is for individuals who are below 55 years old. Disclaimer applies.

Over the course of the past few years, I had achieved two of my personal financial milestones, and those were the clearance of my home mortgage loan and hitting my Central Provident Fund Special Account (CPF SA) to the full retirement sum (FRS). The next step in my overall (read: lifetime) financial strategy would be maximising my gains and returns in the CPF Ordinary Account (OA).

We all know that the CPF OA returns an interest rate of 2.5% per year (and 3.5% per annum for the first SGD 20,000), but if we are able to invest with a diversified portfolio in the financial markets, we are likely to get higher returns over the course of 10 years, which is my bare minimum for an investment period. For instance, even considering the recent fall of the markets due to COVID-19, the balanced Bedokian Portfolio using U.S. based securities for the 10-year period of 1 May 2010 to 30 April 2020 would have an inflation adjusted compound annual growth rate (CAGR) of 6.3%1. Even for the basic 60% equities / 40% bonds portfolio in the same timeframe returned an inflation adjusted CAGR of 6.77%2.

I had started implementing my Bedokian Portfolio with the CPF OA (you can read up on how to do it here: Part 1 and Part 2), but there are limits imposed on the investable amount for shares (35%) and gold (10%). Though Exchange Traded Funds (ETFs) are not part of the abovementioned limits (with the exception of the SPDR Gold ETF), you can only choose from (currently) four, all of which are focused on the Singapore market. Therefore, to invest my CPF OA in overseas markets, I would have to look for another financial instrument. 

This is where unit trusts come into the picture (I understand that there are investment-linked insurance products, or ILPs, that has unit trusts, too, but I want to keep this post purely investment-related). They are professionally managed products and have a wide range of exposures ranging from asset classes to regions and individual countries. Although I am not against unit trusts (they are good investment vehicles in some cases), the major gripe I have with them is their high total expense ratios (TER) (as compared with ETFs). On top of the annual management fee (mostly around the range of 1.5% and above for equity unit trusts, based on the list here), there is still the one-time initial charge or front end load fee.

Enter Endowus

About eight to nine months ago, I stumbled upon Endowus on the Internet, and I believe they were (and still are) the only robo-advisory platform that can invest your CPF monies (they can invest in your cash and Supplementary Retirement Scheme savings, too). Through their selected funds (CPF approved, of course), I am able to invest my CPF OA in the international markets at a lower TER than if I had invested them myself, due to Endowus rebating 100% of the trailer fees. Being a robo-advisor, they could do a rebalance of the unit trust funds in the portfolio back to your desired allocation. For all these, Endowus charges an access fee of 0.4% of your assets under advice per year, quite a reasonable rate among all robo-advisors. 

With the above plus points, I decided to go for it by investing an initial SGD 10,000 with monthly injections from my CPF OA into the portfolio. 

My experience of setting up the Endowus account was pretty straightforward, but you need to have some information at hand, such as your CPF investment account (CPFIA) number. If you do not have this yet, go to either DBS, UOB or OCBC to open one (you can only have one CPFIA, no multiple accounts are allowed. Please read up on the prevailing charges and fees from each bank before settling on one). Also, an account with UOB Kay Hian will be opened, as the funds purchased under the Endowus platform are transacted by and custodised with them, in your own name. For my case, I used my UOB Kay Hian brokerage account number during the registration.

After the Endowus account had been set up, you are ready to go. The platform will ask for your investment goal (“general wealth accumulation”, “my retirement (coming soon)” and “a significant purchase (coming soon)”), risk tolerance for the goal (“preserve my capital”, “grow my capital by taking some risk” and “maximise my returns by taking greater risk”) via dropdown menus, and a slider for “worst 12-month percentage loss I can tolerate for my investment” for the latter. 

I chose my investment goal as “general wealth accumulation”, risk tolerance of “grow my capital by taking some risk” with 35% percentage loss tolerance, and I was recommended a 60%/40% equity/bond portfolio with the following funds, their focus (condensed from Endowus website) and their portion in percentage:

Equity Portfolio (60%)
  • Lion Global Infinity U.S. 500 Stock Index Fund: The U.S. S&P 500 index. This is a feeder fund to the Vanguard U.S. 500 Stock Index Fund (24%).
  • Natixis Harris Associates Global Equity Fund: Invests in companies whose shares are trading at a substantial discount to its intrinsic value (18%).
  • Schroder Global Emerging Market Opportunities Fund: Invests in companies especially from emerging markets such as China, Korea, Brazil, etc (9%).
  • First State Dividend Advantage Fund: Focused on Asia ex-Japan based companies that have potential dividend growth and long-term capital appreciation (9%).

Bond Funds (40%)
  • Legg Mason Western Asset Global Bond Trust: Primarily on high quality debt securities from Singapore and major global bond markets such as G10 countries, and Australia and New Zealand (16%). 
  • UOB United SGD Fund: Money market and short-term interest-bearing debt instruments and bank deposits, majority from China and Singapore (12%).
  • Eastspring Investments Singapore Select Bond Fund: Consisted of Singapore government, quasi-government and investment-grade debt securities from outside Singapore (12%).

The funds are well diversified, besides the obvious diversification of asset classes; there are regional (U.S., Asia-Pacific), state of the economy (developed, emerging), investment style (value investing and growth) and the type of fixed income (short-term, investment grade, etc.).

My Experiences So Far

Overall it is a seamless experience, but that is what robo-advisors are all about; you just contribute the amount needed and they will do the selecting, transacting and rebalancing automatically. If you want to make some changes (e.g. changing the monthly contribution), you can do it on their platform, which to me it is easily navigable and user friendly. You will be informed via email a few days before the scheduled deduction from your CPF OA for the monthly investment, and when the investment is done.

More on the user interface, you can view the breakdown of the equity and bond sector allocations and their top 10 holdings, something like what you see on a unit trust fact sheet, the difference being this information are from all of the underlying funds in your Endowus portfolio, not just one. I also find the interactive goal projection chart interesting as it showed, based on their simulations, the range of possible outcomes for your portfolio. 

Conclusion And Caveat

Before jumping in on the CPF investment bandwagon, you will need to do a self-review of your CPF commitments, if any. A lot of people used CPF OA for their home mortgage payments, and some for funding their children’s education. Being also one of your major retirement schemes, you have to consider if you are able to hit the future basic retirement sum (BRS), FRS or enhanced retirement sum (ERS) to facilitate the eventual CPF-Life payouts. It is important to note that investment is long term (at least 10 years in my definition), so do plan ahead carefully and know what you want.

Past performances of the funds stated in this post do not guarantee future results.

Click on this link and get SGD 10,000 managed free for six months (SGD 20 equivalent). 

All proceeds gathered from the affiliation will be donated to charity.

1 – Portfolio Visualizer ( Backtest Portfolio Asset Allocation. Balanced Bedokian Portfolio of 35% equities, 35% REITs, 20% bonds, 5% commodities and 5% cash using their representation counters VTI, BND, VNQ, GLD and CASHX respectively (accessed 20 May 2020).

2 – ibid. 60/40 equity/bond portfolio using VTI and BND respectively (accessed 20 May 2020).


Investment Products Included Under CPF Investment Scheme (CPFIS). Jan 2020. (accessed 20 May 2020)