Updated: Sep 29
Last week, I wrote an article on CPFIS Funds.
As usual, some morons people were critical that past performance doesn't equal to future performance. I would encourage them to stop concurrently using Robinhood or using platforms that don't even have a long track record of past performance.
In any case, other people had a reasonable gripe in my emails and Whatsapp messages: that was:
a) CPF Funds have failed them before [and one or two even sent me screenshots of their portfolio upon request)
b) They lost a lot of money from purchasing through intermediaries
c) One or two of them even recognized some funds on this list or outside of the list (most notably First State Dividend Advantage) that they had sold a long time before these annualized returns came to fruition.
These are all pretty decent reasons for why CPFIS may be conceptually rejected by people who have had negative experiences before. I thought I'd just take some time out to explain why CPFIS failed back then, and how it could be a completely different experience for consumers now.
Reason 1: Fees
From 2007 to 2018, sales charges on CPF-Investment products were as high as a 3% sales charge, as well as high recurring fees.
Now, there are no sales charges and a maximum of a 0.4% recurring fee.
For emphasis on how much that could affect a return, take a look at $100,000 across a 25 year period at a 7% net compounded rate.
With 3% sales charge, 1.5% recurring fee: $369,900
With 0% sales charge, 0.4% recurring fee: $494,230
That's really significant. And it isn't an unrealistic scenario - a gross pay of $4050/month for 8 years, not including any kind of bonuses or pay rises - would leave that much money in your OA.
Many women actually have much more than this before the age of 30, since they can begin work earlier and their career advances faster.
A lack of sales charge aligns your investment interest more with your Financial Consultant - they only make more money if you do well, not get paid a tremendous amount upfront for commissions.
These fee changes ultimately result in better results for the client and a higher probability that you'll be served better.
Reason 2: Investment Comfort and Range
Back in the early days, the range of investments were more limited and less accessible. The one investment that I keep getting up from both experience and emails is a Singapore Growth Fund - basically, an actively managed fund benchmarked against the STI ETF.
It makes sense, since an investment into stocks that we could recognize on the street would be something comforting (especially with little investment information at the time).
There are many versions of the Singapore Growth Fund, but Dr Wealth's article actually covered them briefly when discuss the STI ETF, which is the Straits Times Index Exchange Traded Fund (Top 30 Blue Chip Companies in Singapore).
The guide is not exactly timeless - it's pretty old, and its fee descriptions are pretty skewed - but some of the general points stand, and the data compiled at the time is easily verifiable.
Variations of this were attached to ILPs of old and I'm not going to suggest they performed a lot better than this. The case studies who I'd seen made a lot more money were typically invested outside of Singapore, but that'd be few and far between.
Its not at all surprising that people would be dissatisfied trying to use similar options for investing their Ordinary Account money - and given prevailing rates that are risk free - they'd be wildly dissatisfied.
Reason 3: Risk Premium But Defensive Investing
In addition to a lack of range, not a lot of people understood Risk Premium at the time.
'The risk premium is the rate of return on an investment over and above the risk-free or guaranteed rate of return. To calculate risk premium, investors must first calculate the estimated return and the risk-free rate of return.'
In English, this means that since CPF currently provides a guaranteed rate of return, forsaking this costs you quite a lot - and the only way you would accept such a trade is if you were making significantly more than the guaranteed rate provided.
We actually do this all the time - usually by putting money in fixed deposits for a higher interest than the risk-free, guaranteed rate of return of having money in cash.
It trades risk - in this case, liquidity (the ability to take out your money any-time without interest penalties) for a high return on interest.
Because CPF's guaranteed rate of return is significant, you have to account for a risk premium that is significantly higher. For myself and clients, I typically aim for at least 5% or higher.
Unfortunately, if you didn't know or understand this concept before, some people would have forsaken their CPF rates to invest in something more defensive like Gold or Bonds, which haven't had historically high interest returns. That's partly why they added additional disclaimers, I suppose.
4) Poor Understanding of Investing Conceptually
Lastly, it doesn't matter whether its using cash or CPF or any platform or currency - people will still find it challenging to Buy Low and Sell High.
Investing still revolves around making such decisions logically, but we tend to buy something at a high point (when it's already yielded large results) and sell it at a low point (when the investment is crashing and we want to stop losing any more money).
CPF Monies undoubtedly still belong to you, and it's important not to feel a dissociation with that money just because you will not be able to withdraw it until 55 or later. Dissociation could cause poor investment decisions, or deny yourself opportunities available to you.
It's always good to speak to a professional about your options. If you have any questions about the article, please do drop me a message.