UPDATE: 9 NOV 2022:
2022 is a year of high inflation, plummeting stocks and uncertain times for investors.
At TWS, we believe that it is important to have a long-term view of investing, especially for CPF monies that are unlikely to be used in the short term.
We’re still holding on to our CPF investments since this article was first published on Feb 25, 2020. We will hold them through this dip, and many inevitable future dips.
BIG SPONSORED POST DECLARATION: THIS IS A SPONSORED POST for ENDOWUS. They are the first “robo advisor” that allows you to invest through the CPF Investment Scheme. This post is also written from the perspective of someone who’s 30 and can still stomach significant risk. If you plan on using or withdrawing your CPF OA in the next 3 years, this approach may not make sense for you.
Since the start of my financial journey in 2014, I’ve pretended that the money in my CPF OA (Ordinary Account) didn’t exist, since I only intended to use it as a way to buy my home.
I try not to fuss and obsess about it. Focus on the big wins, amirite?
After all, ignoring my CPF OA in my mid-twenties didn’t have a lot of opportunity cost, because there was never a lot of money in it (<$20,000).
But as the amount in my CPF OA gets more substantial, I can no longer do that. There’s significant opportunity cost if I don’t invest via the CPF Investment Scheme.
Here is my thought process on why I decided to invest $13,250 from my CPF Ordinary Account.
If you’re in a similar situation, I hope it helps you decide whether or not to invest.
Step 1: Do you believe in investing?
Some people don’t invest their money because they’re afraid they might lose it. I invest my money because I know I’ll lose it if I don’t.
Of course, it also helps that I’m 30 years old with a long investment horizon. This means that I’m able to ride the rollercoaster of the stock market for at least 20 years.
That’s why I invest up to 70% of my cash in the stock market. The remaining 30% I keep as emergency savings in my OCBC 360 account, earning somewhere around <2%.
The way I see it, money in my CPF is something like my OCBC 360. It only earns slightly more interest at 2.5%. So it’s not exactly great at growing wealth, only preserving it.
As you can see, the stock market can possibly provide much higher returns if you are willing to take more risk.
So, if I were to leave all my money in CPF OA, it would kinda be like leaving all my cash in my savings account and not investing.
NOV 2022 UPDATE:
Like everyone else, my 2021 Endowus investments are in the red. I don’t have any superpowers preventing me from taking losses. Neither am I some genius.
However, my initial investment with Endowus in Feb 2020 is actually still up by 17.32%. Going further back, SP&500 index funds bought in 2017 are up by 60%.
To overcome the reluctance to invest every month, I’ve set up a recurring monthly investment for my OA contributions. This helps me dollar-cost average (DCA) into the markets consistently.
Why DCA? Because it’s a tried-and-tested way of investing that doesn’t require me to think much. Just automate it and take the mental gymnastics out of it.
As seen from the chart below from Endowus, even for something as disastrous such as the 2001 Dot Com crisis, doing DCA still gives a 28% return on your investments.
Step 2: Do you have enough to invest?
With cash savings, we’d usually advocate people don’t invest money they need in the next 5-10 years. With CPF, we think you shouldn’t invest money you’d possibly be using for a home – after all, most Singaporeans buy homes with their CPF.
I’m no different, so I should leave some money in there to pay for the downpayment. Here’s the math of how much of a downpayment is needed, using a mortgage calculator based on a $400,000 flat with a ($50,000 HDB grant)
I’ll need to pay $43,750 ($87,500 / 2) assuming I split it evenly with my girlfriend.
At present, I’ve got approximately $77,000 in my CPF. Assuming I buy the flat with my girlfriend, subtracting the downpayment means that I will have $33,250 (because $77,000 – $43,750) of my CPF to invest with.
NOV 2022 UPDATE: In these two years, housing prices have risen significantly. This means that a $400,000 house in the past, might now be $500,000 instead. Please do not invest money that you’ll need for a home!
So, should I invest whatever’s left?
Well not exactly.
For starters, I’d like to have to have six months of mortgage payments in my CPF OA in case I lose my job/TWS goes bust. That way, I could still pay for my hypothetical flat if I become jobless.
That said, CPF has already added safeguards.
You can only invest the excess of $20,000 in your CPF OA.
With that, the amount that I can invest for my CPF despite my housing commitments will be at $13,250.
NOV 2022: Added this table for better clarity:
|You have this much left in CPF OA after paying for a home||You can invest this amount in your CPF OA|
|$20,000||Cannot. Try again later.|
Step 3: How should I invest that sum?
Our investing strategy – whether using my CPF or not – I want to:
- Spend as little time as possible monitoring the market (and more time living life. And earning money).
- Expose myself to appropriate risk (and therefore, returns).
TWS advocates a passive investment strategy that involves diversification across companies, asset classes, as well as geographical regions. You can read more here.
However, for less effort and slightly more cost, there are roboadvisors such as DBS DigiPortfolio, MoneyOwl, StashAway, AutoWealth, Endowus and Syfe that attempt to play the same passive investing game.
That’s actually how I arrived at using Endowus to invest my CPF
It was a pretty straightforward pick.
They’re the first CPF-approved roboadvisor. I also qualify for the minimum deposit for Endowus, which is now only $1,000.
They are also actively improving the funds available within the CPF investment scheme, and will soon include low-cost funds from Amundi that are just as low-cost as equivalent Irish domiciled ETFs.
Hold up – what about CPF Special Account’s guaranteed 4% interest instead?
There has been lots of talk about emptying your Ordinary Account to your Special Account to earn that guaranteed 4 % interest. This is thanks to folks like Mr 1M65 himself, Mr Loo Cheng Chuan.
We don’t think it’s a bad strategy. On the contrary, we think it could work for a lot of people. However, this is why you might not want to:
Risk vs reward
4% “guaranteed” interest is amazing for a bond. But it pales to the historical long-term return of stocks. Of course, stocks come with higher risk than CPF SA.
Our rule of thumb is this: the younger you are, the more risks you should take. The older you become, the safer you should become.
We are also in our early 30s, so we still think that’s pretty young. Maybe when we turn 50, we’ll start liquidating our CPF investments and shift them to our Special Account.
We like having money, and we hate locking stuff up away for long periods of time.
Now, don’t get us wrong, we are big believers in CPF – we’ve even stuck our neck out there to say it before and have gotten hate for it.
But the process of putting OA into SA is irreversible. To put a significant amount of our net worth away for the next 30-odd years?
We simply don’t feel comfortable with that.
Because CPF might guarantee 4% today, but it’s heavily affected by government policy. What if it’s 3% in 2030, 2% and in 2050? I’ll still be stuck with lots of money in there, unable to use it for my housing needs.
Best not to be too dependent on it, after all, a huge chunk of our hard-earned salary and bonuses are at stake.
All that said, if we’re closer to retirement age of 55, this might be worth serious consideration. The chance of major CPF policy changes over 10 years, is far lesser than 30 years.
We’ll check back again in 10 years.
A parting word
We’re in a bear market right now.
This is probably when most people start to lose faith in investing. Already, there are signs that retail investors have exited the market.
But consider this: It is objectively a better time to start investing now than in 2021.
‘Buy the dip’. ‘Stay invested’. ‘Diamond hands’. These things are easy to proclaim when markets are hot. Less so during periods of uncertainty.
2022 has been a test. And it’s likely the following years will test us further.
Here’s something you need to remember even when things look gloomy:
Investing today won’t help you beat the inflation of 2022, 2023 or 2024. But it will help you beat the inflation of 2030, 2040, or 2050.
Keep your eye on the prize and think long-term. Stay invested. Work on your earning power. Average in. Manage your risk.
Remember: It’s what you do in the dark that puts you in the light.
Stay woke, salaryman
NOV 2022: Find out more about Endowus latest third-year anniversary and related promotions here.
[PS: Join our telegram group so social media algorithms won’t keep us apart.]