Monday, January 23, 2023

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 na├»ve 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)

Monday, January 16, 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 (2nd Ed), p137–138


Saturday, January 7, 2023

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 (2nd Edition), p160