- How should you plan for a comfortable retirement? Investing consistently with an evidence-based approach is key to reaching your goals and building your nest egg.
- We are all different: Invest your money based on your circumstances, your goals, your financial needs, and your risk appetite.
- It is important to pick low-cost options, so you must scrutinise the fees you are paying.
- When it comes to CPF investments, you can invest your CPF OA savings after setting aside $20,000 in the account. Before you invest, build up your safety net using CPF first.
- All investments come with risks. Understand the product you’re buying, the company you’re dealing with, and the risks involved.
- Explore the free Endowus Fin.Lit Academy to learn about investment fundamentals, how you can optimise your CPF, personal finance tips, and retirement planning.
- To invest your CPF OA with Endowus, click here.
Looking at your to-do list and planning to check off "start investing"? We’re here to help.
Endowus is proud to have partnered with the Central Provident Fund (CPF) Board in a recent webinar — we’ve now made available the replay of the Maximising Your Money webinar here, so you can catch it at your own convenience. We’ve also recapped the highlights from the session, so you can be readily empowered to take your first step in your investment journey.
Speaking at the webinar were Endowus chief executive officer (CEO), Gregory Van; CPF Board Senior Deputy Investment Director, Ong Hwee Beng; as well as CPF volunteer and ex-financial blogger, Thong Jun Xi. Georgina Gao from CPF Board moderated the session.
Together, they shared personally on what CPF members should look out for when looking to maximise the use of the CPF Investment Scheme (CPFIS) — this scheme lets you invest your Ordinary Account (OA) and Special Account (SA) savings in a wide range of investments to boost your retirement savings.
Watch the CPF investment webinar replay
What is investing?
Gregory Van: It took me a long time to figure that out myself, through my own investment journey. I went through different phases to finally be investing properly. The first phase would usually be saving money and keeping it in the bank. With savings, there’s very little chance of losing your money, but it’s almost guaranteed that inflation will decrease the purchasing power of that money.
The next stage for me, after saving, was to start “investing” — but what I was actually doing was speculating. I thought I was a genius because my first investment gained 7% in just a few days. I was doing a lot of day trading, and at one point my portfolio was up by about 300%, but it would later go down by 90%. I spent a lot of time and effort trying to grow my money, but at the end of the day, the outcomes were random despite the high risks I took.
On the other hand, with evidence-based investing, you can actually get a return that compensates you for the risk that you take. And there are techniques to achieve that. Importantly, how you invest your money should also be geared towards your life circumstances, your goals, when you will need the money, and how much risk you can tolerate.
How did you start your investment journey?
Thong Jun Xi: I’m in my early 30s, and I started investing when I was 20. I was interested in growing my money and letting it compound over time. I read books about financial planning and investing, and what sparked my interest to invest was the desire to build a comfortable nest egg for my retirement. To do that, you have to invest and do it consistently over the course of your working life. Being young, I could start early and let compound interest work my money harder for me over a long time horizon.
But I began by speculating — I bought a stock, but later lost money on it. That led me to do some research on how to make better investment decisions.
Gregory Van: When you’re just starting to invest, you can gradually build up your portfolio. You can easily do dollar-cost averaging (DCA), also known as a regular savings plan (RSP). That means investing a fixed amount of money regularly, such as on a monthly basis. It’s a good behavioural way to automate your investments. With DCA, when the markets go up or down, you’re basically averaging out your cost every month as well.
Why you should stay invested and diversified
Gregory Van: The following chart shows how $1 would have grown over the past 53 years in the financial markets — if the money were invested in global stocks, long-term government bonds, or US Treasuries, as compared to 2.5% per annum (p.a.) growth. This also illustrates the dramatic power of compounding: for example, $1 could grow to $18.70 when invested in long-term government bonds in this period, and even reach $53.30 in global stocks. But you will need to tolerate the ups and downs of the markets over time.
By investing in global stocks, you take more risk and therefore get a higher return (over the 53-year period), but you also tolerate more ups and downs. As for bonds, which are generally lower-risk than stocks, the return is lower over the period. You can also see the difference in the effect of compound interest of 5.7% p.a. for bonds versus 7.9% p.a. for stocks.
Smart, diversified risk for compensated return
When your money grows at 2.5% p.a in CPF OA, there is no chance of you losing the money. But it also means that you end up with about 3.7x your money after 53 years, versus the possibility (which is not guaranteed) of getting 18x or 53x your money over the same period.
Read more: The power of compounding interest explained
Does the market outlook matter?
Gregory Van: In terms of the market conditions today (as of March 2023), interest rates and inflation have gone up. Some investors expect the interest rate hikes to end soon, but I prefer not to take a view on that. I think you should instead be investing based on the amount of time you have before you need to take that money out.
Looking at the 53-year chart (above), there have been many periods of high inflation, high interest rates, global financial crises, budget deficits, wars, and other events affecting the markets. But at the end of the day, if you take more risk, are diversified, are smart in the way you’re getting exposure, and have enough time, you can get compensated in the returns.
Stock prices are changing non-stop, all the time — you can’t watch them all day. To me, investing is not about trying to watch that stock ticker going up and down. It’s about sitting back, investing in an intelligent way that suits your life goals and what you can tolerate from a behavioural standpoint, and positioning yourself properly in the markets based on your goals.
Georgina Gao: So we need to do our homework before investing. We need to know more about ourselves, our risk tolerance, and so on. Diversification is also important — if we can, we should invest in many industries and across asset classes such as stocks and bonds.
How should a beginner start investing?
Georgina Gao: We’ve talked about stocks and bonds. Let’s talk about other investment products such as ETFs and REITs, in case any viewers are unfamiliar with them.
Gregory Van: ETFs or exchange-traded funds are essentially investment funds that are listed on an exchange. ETFs are not too different from unit trusts, which are also known as mutual funds — unit trusts are not listed.
In deciding whether to buy an ETF or unit trust, you should think about what exposure you’re getting, what fees you’re paying to the fund manager, and what fees (if any) you’re paying for the transaction. And, very importantly, consider how the platform that you’re using is getting compensated — that is, how the platform is earning fees.
For example, if a platform is earning fees when you transact, it might be more incentivised to make you transact more, so it can earn more fees. Or there might be trailer fees, which are basically sales commissions that a fund distributor platform can collect from the fund manager for selling a certain product. If a platform is earning trailer fees from a fund manager, it might be incentivised to sell to you a fund that pays it higher sales commissions or trailer fees.
More and more people are becoming aware of the different fees that are involved in investing. Besides the costs, other important things to consider before starting your investment journey include your risk tolerance, when you will need to use the money, and why you’re investing (or what goal you’re investing towards). Only after that should you think about what to invest in, and how.
For many beginners, the first thing they ask is, “What should I invest in?” Or they say, “Just tell me what to buy!” That should not be your first question.
- Learn about the cheapest index unit trusts available for CPF investing, trumping ETFs on costs
- Learn about hidden trailer fees eating into your investment returns
Using CPF savings to invest
Georgina Gao: What if an individual currently does not have cash to invest. Can they use their CPF savings for investments?
Ong Hwee Beng: You can use your CPF OA savings for investments if your OA has more than $20,000. Or, you can use your CPF SA money if it exceeds $40,000. But take note that the SA pays you a risk-free return of up to 5% per annum (p.a.), and our SA savings can grow greatly if we let the power of compounding work its effect over time.
Before you invest, it’s a good idea to build up your safety net using your CPF first. For CPF members below 55 years old, you can use your OA to top up your SA and earn up to 5% p.a. And for members above 55 years old, you can top up your Retirement Account (RA) and earn up to 6% p.a.
But of course, we also understand that CPF members want to earn higher returns for their OA savings. In this case, if you have a lower risk tolerance and your investment horizon is relatively short, you can put the OA money in fixed deposits or Treasury bills (T-bills).
Gregory Van: CPF Board has generously kept the OA interest rate at 2.5% p.a. for about two decades, even when the savings deposit rate was significantly lower. In contrast, the returns from the global stock market have been highly volatile with huge swings over the years. But this can pay off over time, in the form of a longer-term return.
As the chart below shows, if you had kept your money in OA, $100,000 would grow to 2.5x or about $254,000 from January 1990 to February 2023. If that money had been invested in globally diversified stocks, represented by the MSCI All-Country World Index (ACWI), you would go through many periods of losses and recoveries, but after enduring the ups and downs, your money would grow to 5.4x or about $541,000.
Compounding returns over time
That is what investing looks like. It’s about collecting returns for the risk you take, and compounding them over time. You need to ask yourself whether you’re willing and able to trade the guaranteed, risk-free return in CPF OA for a higher return (that is not guaranteed) from investments if you have the time to get there.
Read more: Five things to note before investing your CPF
Investing CPF savings for the long term
Gregory Van: For most individuals, your CPF OA investment horizon is extremely long. After the withdrawal age, you will need to spend through your SA — slowly, ideally — before you can touch your OA. So your CPF OA savings are the last money you can spend, which means it has a very long investment horizon if you can tolerate the risk.
For example, some individuals, depending on their circumstances, will likely only start spending their OA when they’re 85 years old. So if you’re 60 now, you have 25 years to invest your OA. If you’re 30, that’s over 50 years left. That is where the compounding power of the markets can really work its magic.
CPF by design is your longest-term money
Ong Hwee Beng: I would like to add a caveat to this point about CPF OA having a long investment horizon. Sometimes your personal circumstances may change, for example you might suddenly lose your job but still have to service your monthly mortgage repayments. You don’t want to be caught in a situation whereby you’re forced to sell your investments when the market is down, maybe by 15% or 20%, just to raise funds to pay your mortgage. So this is something to keep in mind.
Ultimately, CPFIS is the members’ choice, whether they want to use their OA savings for investments or not. If they don’t feel confident about investing, they can always use the OA savings to pay their housing loans and reduce their liabilities first.
Identifying investment scams
Thong Jun Xi: Early in my investment journey, about 10 years ago, I heard about an investment scheme from my friend. Back then, it involved gold. Now, it might be something like cryptocurrency. That gold investment scheme promised returns of 20% every year, and I thought, “Wow!” and put about $5,000 in. But 10 years later, that $5,000 has become zero. I’ve not gotten a single cent back.
For most people who are just starting to invest, it’s normal to be attracted by the promise of high returns. But you have to be very careful with what you’re investing in and always do your own research: Is the product regulated? Is the platform licensed by the Monetary Authority of Singapore (MAS)? If something is not regulated or licensed, are you comfortable with putting your money in it? For me, the answer is clearly no. Always understand what you’re investing in.
Georgina Gao: What are some tips to avoid investment scams?
Ong Hwee Beng: Firstly, you should check that the company you’re dealing with is not on the MAS Investor Alert List. Secondly, you have to do your research into the product you’re buying, just as Jun Xi mentioned. In particular, don’t just focus on the expected return that the product promises — you also have to consider the risk, and assess whether you’re comfortable with it. Risk refers to how much money you can tolerate losing, what’s the maximum amount of loss for this product, and under what circumstances can this loss happen.
All investments come with risks. So you have to look at not just the expected returns but also the risks. To get a good grasp of the risks, do your research to find out more about the product. In particular, try to understand how the company or product makes money in order to generate the promised return.
Another red flag of scams is if they offer you rewards for bringing in new investors or new money into the investment scheme. This may indicate that it’s a Ponzi scheme, which is when they use money from new investors to pay the earlier investors.
Gregory Van: If someone is guaranteeing you a very high return, it’s a red flag. For example, if they’re guaranteeing me 6%, I would already raise an eyebrow. If they’re guaranteeing 10%, I would say it’s highly unlikely. If they’re guaranteeing 20%, I would just walk away. If it’s too good to be true, it’s likely not true. The financial markets are pretty efficient, and guaranteed returns are very, very hard to come by.
As Singapore’s first and leading digital advisor for CPF investing, Endowus is proud to work with CPF Board to have investors learn more about CPFIS. Get started on your investing journey with us — be it with CPF, SRS, or cash.
Explore the Endowus Fin.Lit Academy to learn about the basics of investing, how you can optimise your CPF, personal finance tips, and retirement planning.
If you would like to register for events organised by CPF Board, please visit this link.
- Five things to note before investing your CPF
- How Endowus improved CPF investing in Singapore
- Can your CPF savings keep up with high inflation?
- Should you invest your CPF money in T-bills?
CPF Board disclaimer
The information presented in this webinar is accurate as of March 2023. Guests are not paid for their appearances on the webinar. The views expressed by guests are their own, and their appearance on the webinar does not imply any endorsement of them or the entity they represent.
Investment involves risk. Past performance is not necessarily a guide to future performance or returns. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.
Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endowus Singapore Pte. Ltd. (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.
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