When USD Is Up, The Price Of Gold Goes Down…

And vice versa.

This was one of my first financial advice dished out by my father while I was young. Somehow this sticks in my mind for a long time, like those childhood experiences, good and bad, where it remains with you forever.

 

When I started to know more of economics, finances and investing, it was obvious that this was a result of one of the most important attributes in an investment portfolio: correlation.

 

The current times are challenging due to rapid inflation followed by increasing interest rates, macroeconomic factors that had not been seen in at least a decade and a half. Major asset classes fell, yet there are some still holding, or even profiting, from the prevailing economic environment. Drilling down further, some regions/countries’ asset classes may have performed better than others; and going down even further, some sectors/industries of some places may be better than other sectors/industries of other places.

 

Such is the levels of diversification, another important aspect of portfolio management. It is not advisable to concentrate all into one asset class, region/country or sector/industry, for one big bang will bring massive pain to an investment portfolio (afterthoughts on SVB’s client base). Diversification is designed for two things: to prevent greater than normal losses in down times, and to let you sleep somewhat better at night.

 

Going back to the assumption in this blog post’s title, there is truth to it, to a certain extent.

 

Since gold is priced in USD, the argument for this assumption is that a weakened USD makes the price of gold cheaper, hence the latter’s higher demand, and the reverse, i.e., stronger USD, would make gold more costly, thus lowering its demand. However, there are other reasons, too, such as periods of inflation where gold is favoured due to its deemed hedging properties. Sometimes in moments of economic crises, USD and gold had shown some positive correlation. 

 

As with most relationships in the intricate world of economics, finance and investments, there is no single absolute link between the various asset classes, sub-asset classes, etc., let alone the one between USD and the price of gold. And these links may be positive or negative. In short, correlation does not imply causation, and all assumptions are made on certeris paribus (assume all things equal).

 

It is precisely this correlation, positive and negative, that brings variation in protecting an investment portfolio, and this variation is important in navigating the not-so-smooth path of investing and building the retirement pot.

 

Hence, this is why most in the investment circles would say that diversification is probably the only free lunch around.

SVB And Silvergate: A Storm In A Teacup(?)

The last few days saw the markets (especially in the United States) rattled by the bank collapses of Silicon Valley Bank (SVB) and Silvergate Capital (Silvergate). 

Both SVB and Silvergate are bona fide banking entities, and their simultaneous downfall within the space of a short time caused the S&P500 index (which SVB was a constituent, emphasis mine) to go down above 3% over the last two days, not to mention the tumbling of major bank stocks such as Bank of America and Citibank. All the major business news networks were having a field day (or two, or three) reporting on this, and there were fears that this event may be 2008/2009, part deux.

 

Being a rationale investor, I needed to know what was going on and had searched the internet to find out what really happened. Below is a point-by-point issues of the event:

 

• Both banks were experiencing liquidity issues to service customer withdrawals, and this led to bank-runs due to (or as a result of) the lack of depository funds.

• The major clientele for SVB were venture capital firms, startups and technology companies, whilst Silvergate’s customers were mainly from the cryptosphere.

• Rising interest rates and the subsequent rise of short-term bond yields caused longer term bonds, which SVB was holding, to fall out of favour and in price.

• The fall of cryptos during the last 18 months or so hastened the fall of Silvergate, which had concentrated on this business space since around 2018.

• The Federal Deposit Insurance Corp (FDIC) had stepped in as receiver for SVB, and it will be business as usual from 13 March 2023.

 

The Bedokian’s Take

 

The SVB-Silvergate scenario, in my opinion, could not hold a candle to the scale of the contagion of 2008/2009, that time which affected the big banks, insurance and financial firms. Rather, I would classify it as a localized issue within two banks themselves, since the lack of depository funds sparked the bank run which accelerated their collapse. Furthermore, their customer bases were specific, so the subsequent ripple effect would probably be a ripple, and not a tsunami as seen in 2008/2009. The FDIC stepping in for SVB is a good sign that things would be going back to at least normal.

 

In other words, I would describe this as a storm in a teacup.

 

As with what I had always mentioned, such times are good to look out for bargains, especially bank and financial-related counters with strong fundamentals, or perhaps you may find other fundamentally good non-bank counters that had taken a tumble in the past few days.

 

Stay calm and stay invested.

 

Disclosure

 

The Bedokian is not directly vested in any of the mentioned listed entities.

 

Disclaimer

 

Inside The Bedokian’s Portfolio: Frasers Logistics & Commercial Trust

Inside The Bedokian’s Portfolio is an intermittent series where I will reveal what we have in our investment portfolio, one company/bond/REIT/ETF at a time. In each post I will briefly give an overview of the counter, why I had selected it and what possibly lies ahead in its future.

For this issue, I will discuss about the locally listed real estate investment trust (REIT), Frasers Logistics & Commercial Trust (FLCT, ticker: BUOU).

 

Overview

FLCT held a total of 105 properties across five countries (Australia – 50.9%, Germany – 24.1%, Singapore – 9.8%, United Kingdom – 9.6% and The Netherlands – 5.6%) and spanning logistics and industrial complexes (68.3%), offices and business parks (22.5%), and central business district commercial properties (9.2%)¹.

 

Why FLCT?

 

FLCT, or rather one of its predecessors, Frasers Commercial Trust (FCOT), is the longest holding in the Bedokian’s portfolio, starting in 2009, way before my “great awakening” in 2013. I initially bought FCOT for trading, but as time goes by it survived its position in the portfolio, with additional purchases, to the present day. The reason for its retention was FCOT’s commercial play and I felt it suited an inclusion.

 

Before the merger with Frasers Logistics & Industrial Trust (FLIT), FCOT had one of the lowest gearing amongst the REITs at 28.6%, a respectable dividend yield of 5.75% and a reasonable price-to-book (P/B) value of 1.04 (all figures were as at Oct – Nov 2019). In early 2020, FCOT merged with FLIT to form FLCT (I had written about this here and here).

 

After the merger, and besides rounding up the numbers to make it a multiple of 100 by buying a few 10s of FLIT shares, there is no further additions to the counter. As of the latest financial information, FLCT is still one of the lowest geared REIT at 27.9%¹, with a current dividend yield of around 6.145% with a P/B ratio of 0.95². This presented a good opportunity to average up the REIT, albeit the current rising interest rate environment. 

What’s Next?

 

The prevailing macroeconomic factors are tilting in a positive favour for logistics, with the resumption of supply chain flows expected to improve after the recovery from COVID-19 disruption (especially China, dubbed as “the factory of the world”), and the continued uptrend of e-commerce. The commercial side of things, however, is still dampened by the trend of working from home, though we are seeing an increasing inclination of workers returning to the offices. Rising interest rates would also hamper the yield, with a projected SGD 0.06 drop for every 50 basis points of rate increase¹. Still, FLCT’s low gearing and high interest cover ratio would mitigate somewhat the risks highlighted above and proved to be an attractive REIT for me to add on. 

 

Disclosure

 

Bought FLCT at:

 

SGD 0.165 at Aug and Sep 2009 (as FCOT)

SGD 1.51 at Apr 2015 (as FCOT)

SGD 1.255 at May 2016 (as FCOT)

SGD 1.24 at June 2016 (as FCOT)

SGD 1.26 at Mar 2017 (as FCOT)

SGD 1.47 at Mar 2019 (as FCOT)

SGD 0.975 & 0.98 at Apr 2020 (as FLIT)

 

Disclaimer

 

1 – 1QFY23 Business Update. Frasers Logistics & Commercial Trust. 1 Feb 2023. https://flct.frasersproperty.com/newsroom/20230201_202824_BUOU_R0QWVEFBGWRNFX7C.1.pdf (accessed 19 Feb 2023)

 

2 – Reitdata.com (accessed 19 Feb 2023)

 

The Great Search AI Race

The previous big news was the emergence of an application which can answer almost all questions under the sun (and space if need be). And the last big news about this application was that Microsoft had invested (rather heavily) into it.

 

Unless one is a bit detached from the internet (or undergoing a digital detox), the application I am mentioning is a chatbot called ChatGPT. Created by an artificial intelligence (AI) research laboratory OpenAI, it was launched in November 2022, and immediately it took the world by storm in its ability to reply to questions in detail and could pass it off for essay answers in school assignments.

 

Things got serious when news of Microsoft investing billions into ChatGPT in late January 2023, and within a couple of weeks, they announced the new Bing browser powered by ChatGPT AI. Suddenly, the definition of searching the internet had taken a whole new meaning; no longer searches produce just sites and suggestions (which a user may find it more "tedious" in needing additional manual intervention of clicking the mouse), but it could also give detailed results, answers and more "suggestive" suggestions. 

 

A race was triggered; Google, long being the undisputed champion in (and getting the most money from) its search engine technology, suddenly felt threatened, and a few days ago announced the launch of Bard as a counter, though it got hiccuped with displaying a not-so-factual information with regards to the James Webb telescope. Across the Pacific Ocean, China's Baidu had also said it would launch their own ChatGPT-ish project called Ernie by around March 2023. In other words, ChatGPT or other iterations of it would revolutionise how the internet would be used and structured.

 

To quote a famous phrase seen in many internet forums:

 

"The internet is serious business." – Unknown

 

Alphabet, the parent of Google, dropped almost 9% during the course of the past five days, clearly affected by the goings-on described above. Talk of Google going to be dethroned by Bing in the upcoming search engine wars exacerbated the share price situation. Let us now look at three main points on whether Alphabet is still, in my humble opinion, a long term play.

 

Point #1: Google Is Still Dominant In The Search Engine And Internet Usage Space

 

In 2022, Google’s global market share of search engines for desktop and mobile were 84.7% and 95.6% respectively, compared to second-placed Bing’s 8.6% and 0.6% respectively¹. It is due to this dominance that allowed the word “googling” to become synonymous with the phrase “internet search” (and GIYF: Google Is Your Friend or LMGTFY: Let Me Google That For You).

 

Do not forget that Google still has other services around which are dominant, such as YouTube and Google Maps, and they earn fees and advertising revenues through them.

 

Point #2: The Competition Is Still There

 

Microsoft’s integration of ChatGPT and the deemed imperfections of Bard were, in my view, nothing but “flash in the pan” headlines. Honestly, having AI in search engines is nothing new, just that the investing and trading public were suddenly inundated with a surge of such news, good and bad, for both ends. Google’s quick response, albeit seen as reactive, demonstrated that they are not going to take this lying down. Time is needed to take down a giant, but if the giant is continuously improving itself then the chance of an overnight failure is super-duper rare.

 

During an interview with CNBC², Microsoft CEO Satya Nadella stated that the largest software business is search, and that gave them the drive to go for this area. He even acknowledged that Google “…makes more money on Windows than all of Microsoft”. So an usurping moment is still very far away.

 

Point #3: The New Norm Going Forward

 

When the iPhone was first unveiled in 2007, it was seen as revolutionary, with the removal of mobile keyboards and capacitive touchscreens seen as cool by users. Today this type of mobile device is in almost everyone’s hands. Search AI engines such as ChatGPT, Bard and Ernie will become the new norm in the future once they are integrated with their respective search portals and/or browsers, and adopted for use by the general masses.

 

Going back to the dominance and user preferences, Google would still be in the game. The main risk of Google (and big advantage to Microsoft) would be a defection of users to the other side either via user experience and/or (the bigger one) better integration of applications and services across the entire Microsoft ecosystem, where they have an almost monopolistic hold in the corporate world.

 

Conclusion

 

To say about Google (and Alphabet) getting doomed because of this ChatGPT is a result of recency bias, which definitely is a no-no when looking at things from an investor’s perspective, i.e. multi-faceted and long term. The current price weakness presented an opportunity for me to consider adding in more Alphabet.

 

Disclosure

 

The Bedokian is vested in Alphabet directly and Microsoft indirectly via a S&P 500 exchange traded fund.

 

Disclaimer

 

 

1 – Fleck, Anna. Google’s Search Dominance. Statista. 9 Feb 2023. https://www.statista.com/chart/29267/market-share-of-the-worlds-largest-search-engines/ (accessed 11 Feb 2023)

 

2 – First on CNBC: CNBC Transcript: Microsoft CEO Satya Nadella Speaks with CNBC’s Jon Fortt on “Power Lunch” Today. CNBC. 7 Feb 2023. https://www.cnbc.com/2023/02/07/first-on-cnbc-cnbc-transcript-microsoft-ceo-satya-nadella-speaks-with-cnbcs-jon-fortt-on-power-lunch-today.html (accessed 11 Feb 2023)

I Feel Good, Or Should I?

In the month of January 2023, we had seen the markets reversing itself after the doom and gloom that ended the year of 2022. To start off, for year-to-date (till 3 Feb 2023), the S&P 500 had recovered around 8.2% and the NASDAQ 100 had recovered even more at 15.7%. Our local STI, while being one of the better performers for 2022, had gained 4.3%. To add, our local S-REITs (using the iEdge S-REIT Index) had seen a rise of 8.5%. Just a few days ago, the Federal Reserve had announced an increase of 25 basis points, which was lower than the previous hikes, indicating an assumed (emphasis mine) pivot position by them.

With all these happening, it is easy to have the impression that the good times are rolling in again, and all the talk about doomsday and recession effects would be dampened, if not, very optimistically, non-existent.

 

Depending on who you had read from or listened to, there is still a range of outlooks with regards to the coming times, ranging from those that emit ultra-positive vibes to the ones still giving the dreary-looking auras. However, as always emphasized, the future is difficult to see. Who is right and which is accurate, no one knows for sure, and only time will tell.

 

In the meantime, it is easy to be drawn into this current market excitement and the feeling of FOMO (fear of missing out) is strong especially when share prices are going up. The first reaction to these is not to have any reaction at all. Getting carried away is the last thing on your mind, and instead take a step back and focus on what is at hand, i.e., your investment portfolio.

 

To me, maintaining the balance of our preferred asset allocation mix in the investment portfolio trumps all other things, being a believer of diversification. This might be a good time to take in the current values of the assets, financial instruments and securities, and see if rebalancing is necessary. Rebalancing does not necessarily involve buying and selling with what we have, and we could add in additional capital to carry out the rebalancing with our capital prepped for injection into the portfolio.

 

The next question is what to get. There are two main ways to go about this: the first is to see which asset classes, regions/countries, sectors/industries and/or companies are “out of flavour and favour” for the moment but there is a very strong chance of them turning around, and we could channel the capital towards them. The second way is to do an averaging up, especially on individual counters; this may sound a bit of a paradox of my advice not to go FOMO but there are some counters’ prices, though rising, are still probably within your “buy” parameters, e.g., the counter is still below your calculated valuation, there is a potential growth in the sector of which the company is in, etc.

 

For passive investors and those who carry out dollar-cost averaging (DCA), just maintain your course and continue to do the necessary in your investment journey, i.e., carry out periodic rebalancing according to your schedule, and/or keep on contributing the same amount per period for your investments.

 

Keep calm, stay safe and stay invested.

Should I (Really) Invest My CPF? (Part 2)

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:

 

Choice #	Withdraw Cash Above FRS*	Withdraw Investments From CPF**	Annual Withdrawal Of CPF Interest***
1	Full	Full	NA
2	Full	Partial	NA
3	Partial	Full	Yes
4	Partial	Partial	Yes
5	NA	Full	Yes
6	NA	Partial	Yes
7	NA	NA	Yes
8	Liquidate CPF investments and full withdrawal above FRS
9	Liquidate CPF investments and partial withdrawal above FRS		Yes
10	Liquidate CPF investments and no withdrawal from CPF		Yes

 

*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).

 

Operationalizing

 

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.

 

Conclusion

 

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.

 

Disclaimer

 

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)

Training Your Train Of Thought: The Bedokian Portfolio 200th Post Special

This is a very difficult post to write because I cannot find a starting point to build about it, a structured way to describe it and how to finish it. Yet, ironically, this is regarding training one’s train of thought, where it is supposed to be a (sort of) structured way of organizing the flow of ideas, concepts, realizations, etc., and come up with a conclusion, or a mental springboard to the next idea, concept, realization, etc.

The train of thought for one person is vastly different with another’s, and this is because we are all different. Inherently we have different personalities and characteristics, and from them we have different biases, viewpoints, opinions, etc. of an object, issue, topic, etc. which are presented to us. This led to why trains of thought are very much varied across people.

 

Since this is an investment blog, I will scope this train-of-thought discussion to it. Here are three ways (my opinion) on how to train your train of thought:

 

Way #1: Unlearn What You Have Learnt

 

Borrowing the words from a little old green alien from a popular science fiction soap opera series, the process of unlearning what you have learnt is to flush away whatever biases, viewpoints and opinions on the field of investing. This is applicable especially for newbies as there might be some myths being attached to their impression of investing, but seasoned investors can also occasionally do this “self-cleansing”, too. For me, I do go back and read up basic investment books to relearn and reinforce my knowledge, and sometimes I gain “a-ha!” moments from these readings.

 

Way #2: Know More

 

There are many ways to know more. We have online and offline resources such as books, forums, videos, chat groups, etc. You can also know more from in-person engagements like seminars, gatherings, focus groups, etc. The gist of knowing more is to absorb as much knowledge as possible, and this will benefit not just your investment but in general knowledge, too (and possibly more “a-ha!” moments like in Way #1). With this “knowing”, you can apply it to your many facets in life (and yes in investing, too), which I call it contextualization of one knowledge domain onto another. For example, my post on “Battlefield Lessons On Investing”, I applied World War 2 history into the field of investing. Another example is associative investing¹ in which you make use of the interdependent relationships between sectors and industries to form an investment decision, and better knowledge of these sectors/industries are advantageous.

 

One concern which I know most people would bring up on Way #2 is “information overload”. Since we are at the information age (and there are hundreds of hours of YouTube videos being uploaded every minute), it is understandable to have this issue. For myself, I would “store” non-crucial information at the back of my mind and would practice a “recall” should I encounter it again along my train of thought. If this information is deemed as important to my investment decision, I will read up more about it to have a more informed knowledge.

 

Way #3: Be Open

 

Though this way should belong before the other two ways mentioned above, I decided to put it as Way #3 since it is conclusive and can also serve as a beginning (after all, I had declared in the first paragraph that it is already tricky to write this post). By being open, I meant we should be open to all ideas and concepts, and not to impose any restrictions on them, yet. I had received some feedback on not to read a particular person’s books, or to watch a particular person’s investment videos, or not to listen to a particular relative’s/friend’s/acquaintance’s advice, etc. I believe everyone should be given a chance to be read up or heard out, and see if I could glean some useful titbits from what he/she/they are saying and where they are coming from in their trains of thought. If some of the points raised are feasible, I may adopt them to my investment methodology/style/strategy, else I could either take it as non-crucial information for further recall. 

 

Conclusion

 

It is never easy to change one’s outlook of investing (and life) especially when we have so many biases, viewpoints and opinions already ingrained in us. By following the stated three ways, we could improve for the betterment of ourselves in our trains of thought and at the same time gain copious amounts of information and knowledge. Remember, the greatest hurdle (and enemy) to changing oneself is oneself.

 

Happy coming holidays!

 

 

1 – The Bedokian Portfolio (2^nd Ed), p137–138

Should I (Really) Invest My CPF? (Part 1)

This is a two-parter. Part 1 (this post) deals with the general information and other considerations of investing one’s CPF. Part 2 deals with my personal circumstances and decisions while investing my CPF.

Frankly, when this question was asked, I could not give a definitive answer as each one of our financial situations and goals with regards to CPF is different. Furthermore, it is an oxymoron to ask the question to an outsider, knowing that deep inside oneself the answer is there.

 

So, should you really invest your CPF? Read on to see if you can find the answer.

 

What Is My Risk Profile?

 

This answer is unique to everyone as all of us have different risk appetites and tolerances. While there are numerous questionnaires available on gauging one’s risk profile, I would boil down to just two main questions to ask oneself.

 

The first question would be: how much (by percentage) that you are prepared to lose. 5%? 10%? 20%? More than 30%? Given that the CPF interest rate is almost risk free (with at least 2.5%) and the principal amount will stay intact, remaining it as status quo is the best. Still, for some others, they wanted it higher, knowing that eventually, the smoothed-out returns would beat the 2.5% rate. This means going for higher risk options and seeing the invested principal swinging up and down.

 

The second question would be: how long you are investing for. 1 year? 5 years? 10 years? Beyond that? In the context of CPF, the typical end time would be 55 years old, the point of time where the Retirement Account is formed by setting aside the appropriate retirement sum (basic, full or enhanced), and you could possibly withdraw the balance out from the Ordinary Account (OA) and Special Account (SA). But this benchmark could be pushed further, maybe to 63 (to coincide with the official retirement age), 65 (the earliest point where CPF-Life payouts kicked in, if opted), 68 (the current re-employment age) or whatever age deemed fit.

 

 

Decided on whether to invest your CPF? If yes, then read on; else, you may wish to stop here (but read on for general knowledge if you want).

 

Do I have Enough To Invest?

 

Unlike a pool of readily available monies, there are limitations in how much to invest in your CPF. The first S$20,000 in the CPF-OA and the first S$40,000 in the CPF-SA are not investible. There are amount limits in place on what asset classes and financial instruments to invest in, such as a 10% limit on gold and not all ETFs can be used with CPF (more on this later).

 

Furthermore, you need to know what the commitments are, potential and current, that would/could be drawn from your CPF-OA. The biggest item for most people is property mortgage loan payments, whether you are planning to have your first (or second, or so on…) and/or are currently servicing one using CPF-OA. It is also important to provide a buffer of (my ballpark) at least six months’ worth of mortgage payments should you and/or your co-payer(s) face a loss of job(s) and/or retrenchment.

 

Another major item, for those with children, is education fees. CPF has a provision to withdraw OA funds for your children’s tertiary school fees, called the Education Loan Scheme. Although the loan would eventually be paid back, you would need to manage the OA so that it does not compromise the amount used between education and investing.

 

The Amount That Can Be Invested

 

If you look at your own CPF investment dashboard online, you can see the limits of how much you can invest for OA and SA (see Fig. 1):

 

Fig.1: Investment dashboard view, CPF website.

 

As I had mentioned in my eBook¹, we will only look at investing the OA, since SA is quite restrictive in the choice of securities to invest and the 4% rate is attractive to me.

 

And here are how the limits are derived:

 

35% Stock Limit = [35% x (Prevailing CPF-OA Balance + Net Amount Withdrawn for Investment (if any) + Net Amount Withdrawn for Education (if any))] - Cost of Stock Investment (if any).

 

10% Gold Limit = [10% x (Prevailing CPF-OA Balance + Net Amount Withdrawn for Investment (if any) + Net Amount Withdrawn for Education (if any))] - Cost of Gold Investment (if any).

 

Professionally Managed Products = Prevailing CPF-OA balance – S$20,000 non-investible amount.

 

What Can Be Invested

 

You can find the list of investable financial instruments here from the CPF website.

 

Stay tuned for Part 2!

 

1 – The Bedokian Portfolio (2^nd Edition), p160