Investment Moats

I spend the majority of yesterday compiling this at my workplace and my boss thought it will benefit the readers over here as well. It is filtered.

The unfiltered version is not in this post but in Chan Chun Sing‘s leaked recording and this snippet from Channel News Asia:

Basically, the SMEs are really facing seriously tight working capital issues. And the government’s number one priority is to stop the SMEs from cutting employees during this period.

Here is my summary of our clients and what we think the right financial posture should take at this point.

I think our clients should do OK and my tone has to be more measured. My readers should mostly do OK as well. If there is one thing I would like to emphasize, it is I hope this series of unfortunate & challenging issues can turn around quickly if not there will be a fair bit of people let go on the SME level.

Your friends and relatives working there may be affected and I hope the second part of this article can help them in some ways.

On 18^th Feb 2020, Mr. Heng Swee Keat, Deputy Prime Minister and Minister for Finance delivered Singapore’s FY2020 Budget Statement in Parliament.

Through the budget, Singaporeans can have a better idea of what the government sees, where are their key priorities and how they will allocate the government’s income.

In this article, I will provide a summary of the areas of the budget that may affect your family directly. Thereafter, I will explain what we can learn from this Singapore Budget and provide some tips on the appropriate personal finance posture your family can undertake.

Areas Of Singapore Budget 2020 That May Directly Impact Your Family

In this year’s budget, the government has made significant moves to help Singaporeans manage their expenditures in life, through various rebates, tax reliefs, cash incentives, credits, and vouchers.

Below are some of the moves made this year.  I have grouped them according to traditional areas in which we are most familiar with.

The impact to your family will depend on your age, your family make-up, the type of home you live in as well as your income level.

Cash Incentives

All Singaporeans that are aged 21 years and above in 2020 will received a one-off cash amount.

The amount you will receive will depend on your assessable income for the year of assessment of 2019 (This is not your final taxable income but the income before tax reliefs & deductions)

• $0 to $28,000: $300
• $28,001 to $100,000: $200
• Greater than $100,000 or owns more than 1 property: $100

Additional $100 for Parents

In addition, parents with one or more Singaporean children aged 20 years and below in 2020 can get an additional $100. This is regardless of assessable income.

For clarity, both spouses will qualify for the additional $100 ($200 in total) if they have a child below 20 years old.

PAssion Card Top-Up

Finally, all Singaporeans age 50 years and above in 2020 will receive a $100 top-up to their PAssion Cards in 2020. Merdeka and Pioneer Generation seniors are also included in this.

This top-up is to encourage those 50 years and above to stay active and healthy. They can use the PAssion Cards to pay for the following:

1. Activities and facilities at community clubs
2. Entry to public swimming pools
3. Public transport
4. Essentials and other items

CPF & CPF Life

Clarity on BRS in 2021 & 2022

The Government has published the CPF Basic Retirement Sum (BRS), Full Retirement Sum (FRS) and Enhanced Retirement Sum (ERS) for the year of 2021 and 2022. They will be increased at a rate of 3% per annum.

The rates are as follows:

Clients who turn 55 years old in 2021 or 2022 should take note of these new requirements.

Matched Retirement Savings Scheme

Next, to help older middle-to-lower income Singaporeans meet their retirement needs, the government will match every dollar of cash top-up made to CPF Retirement Account (RA) under a new Matched Retirement Savings Scheme.

Singaporeans who are between the age of 55 to 70 years old and are unable to set aside more than the CPF BRS will be eligible for this scheme.

Between 2021 and 2025, if you top up your CPF RA via the Retirement Sum Top-Up Scheme (RSTU), the government will match it dollar-for-dollar up to $600 a year.

You can help your parents or your non-working spouse top-up their CPF RA to take advantage of this match. This top-up via the Matched Retirement Savings Scheme can boost their future CPF Life payout by an estimated $42 a month ($504 a year)

For example, if your parents turn 55 years old next year and they have only $50,000 in your CPF RA, at 65 years old, the estimated CPF Life income is $495 a month.

If you help top-up $600 every year from 2021 to 2025 into your parent’s CPF RA, the government will match that with $600 every year.

At 65, your parent’s CPF Life payout will be bumped up by $504 a year or $42 a month (Total of $537 a month for a lifetime). Effectively, you are exchanging 5 years of $50 a month payment today for an estimated lifetime income increment of $42 a month.

Silver Support Scheme

Finally, the government has also lowered the criterion to qualify for the Silver Support Scheme, which aims to help those with low income during their working years to have more during their retirement.

1. Payouts will be raised by 20%
2. Instead of the current criterion of $70,000, Singaporeans with no more than $140,000 of total CPF contributions (CPF OA + CPF SA at age 55, including amounts, are withdrawn for housing, education, and investments) by age 55 will also be eligible for this scheme. Self-employed Singaporeans should not have more than $27,600 (previously $22,800) in trade income between the age of 45 to 54.
3. Insertion of a new criterion for those with household monthly income between $1300 and $1800 a month

The significance of this expansion in criteria is that it allows older people to qualify.

Together with moving from a 3 RM HDB to a 2 RM Flexi HDB so that you will have more in CPF Life, the improved Silver Support Scheme could potentially increase your income in retirement immensely.

Personal Tax Rebate Or Relief

For this year, there are no notable personal tax rebates or relief.

Service And Conservancy Charges (S&CC) Rebates

Singaporean households living in HDB flats will receive rebates to offset your Service and Conservancy (S&CC) charges over FY2020:

Vouchers

The government will be giving out grocery vouchers for those who are in the lower-income spectrum.

Singaporeans who are 21 years and above, living in 1 RM and 2 RM HDB flats and do not own more than one property, will receive $100 worth of grocery vouchers each year in 2020 and 2021. These vouchers can be used in participating supermarkets such as NTUC FairPrice, Giant and Sheng Siong.

In addition, eligible HDB households will receive double their regular GST Voucher (GSTV) though a one-off GSTV – U-Save Special Payment. Households with 5 or more members will receive more.

SkillsFuture & Training Grants

SkillsFuture is our government’s initiative to encourage us to be continuously learning so that we can fulfill our maximum potential.

This year, there are 2 one-off credits that are given.

The first is a one-off SkillsFuture Credit (SFC) top-up of $500. To qualify, the person must be a Singaporean citizen, and more than 25 years old as of 31^st Dec 2020.

You can start using the credits from 1^st Oct 2020. Unlike the previous credits, this credit is valid for 5 years after which, if it is not used, the credit will lapse.

The second is another one-off SFC top-up of $500. This is to support Singaporean citizens who are 40 to 60 years old (as at 31^st Dec 2020) in their career transition. This is over and above the first one-off SkillsFuture credit mentioned above.

Like the first SFC, there is a 5-year validity period for this credit.

Effectively, a Singaporean aged between 40 to 60 years old can in total be credited with $1000 worth of SFC.

GST Held At 7% Going Into 2021

In 2018, Mr. Heng announced that the government would be raising the GST by 2 percentage points, to 9%, sometime from 2021 to 2025. This is to raise recurring revenues to meet our growing expenditure, especially on healthcare.

The government decided that the GST rate increase will not take effect in 2021 and it will remain at 7% in 2021. Mr. Heng updated that the increase will still have to happen by 2025.

GST will still be absorbed for publicly subsidized healthcare and education.

Mr. Heng also gave a little more detail on the transitional support that households can expect to cope with this change:

1. Households will receive at least 5 years’ worth of offsets to deal with the additional GST expenses and up to 10 years’ worth for lower-income households
2. Under the Assurance Package for GST, every adult Singaporean will receive a cash payout of $700 to $1,600 over 5 years. For example, a family of four with a combined household income of $6,000 living in a 4 RM HDB flat can receive about $7,000 in offsets over five years in total. This includes cash of about $4,000.

What We Can Learn From The Budget

Budgeting can be carried out at a country level, a company level or on a personal level.

For the past 16 years in my working career, I have been budgeting and I would attribute a significant part of my success to this financial habit I have built up.  Budgeting has provided me with financial clarity. It has assured me that I have sensibly allocated adequately to assets that provide future cash flow for me and allows me to confidently spend the rest in areas that I value.

An effective personal budget should be one that starts with a clean slate. Before thinking about what is needed now and what we need in the future to ensure we live a good life. Followed by allocating our projected cashflow or available cashflow according to our current and future needs.

We call this kind of budgeting system a Zero-based Budget. Every year we bring it to zero, and we critically rethink based on our current and future needs.

The government is doing the same thing and if this is the case, we should pay attention to where they allocate the money.

In every Singapore Budget, we can see a few areas where the government almost always allocate the same proportionate amount of money. But for each budget, there will always be certain focus areas.

These focus areas were recommended based on the data and feedback on the ground.

Many a time, as a family, we might not be able to sense everything. Your wife and yourself may work in 2 specific industries and can only gain anecdotal evidence of how other industries are doing.

However, from the Budget, you would be able to know:

1. The growth areas they are allocating capital to. As a businessman, there might be a blue ocean for you to explore to create a new segment by taking advantage of your experience, competence, and future government funding.
2. Signs that the economy is in prosperity or distress. As a family, there should be a certain parts of your cash flow that can vary depending on how well you are doing as a family and the economic outlook. The country’s budget allocation will shed light on whether one should be conservative with their cash outflow or to spend more freely.

In this year’s Singapore budget, the main themes of resource allocation are:

1. Stabilization and support. An export centric economy is hit by a reverse of globalization, due to a trade war between our two major trading partners. A COVID-19 virus has halted physical interaction and hampered business interaction in the places we export to as well as local consumption.
   • This year’s budget is focused on incentivizing companies in Singapore to retain and re-train Singaporeans
   • It also provides support for companies by allowing them to faster write down their plant & machinery, renovation & refurbishment for 1 year. It gives them greater access to working capital and allows greater flexibility in rental payments at government-managed properties
   • Specific industries such as tourism, aviation, retail, food services, and point-to-point transport services will get additional help
2. Growing our economy. The government will improve support for deep-tech start-ups, help existing SMEs to go digital, provide assistance to 900 most promising enterprises to grow by giving them the support they need.
3. Addressing Climate Change. To reduce our carbon footprint and emissions. There will be significant investments in incentivizing the growth of the electric vehicles in Singapore as well as coastal and flood defense.

There are two significant special packages totaling $5.6 billion to help firms & households. The size of these packages significantly exceeds most analyst’s original projections.

The message is clear:

1. Help the businesses
2. If they do not survive, there will be greater unemployment
3. Greater unemployment will result in a whole host of residual social, family and financial problems for the households

The Appropriate Personal Finance Posture To Take

With that said, we would like to provide some tips on what we think you can take to navigate this environment better.

1. Review & Rationalize your Spending Budget.

Ideally, we should have two sets of budgets.

1. 2. A Baseline Budget. A Budget that is sensible during normal environments. Both spouses have good jobs, growing income. The budget is well aligned with what you wish to achieve today and in the future.
2. 3. A Very Conservative Budget. A Very Conservative Budget is one where we budget mainly the essential spending that would keep the family operational, with minimal allowance for entertainment to maintain the morale of the family.

In challenging times, a spouse could lose their job (in the worst case both). As a business owner, your revenue and profits might be impacted such that you are forced to take a smaller income, fee, or declared dividend income.

In the event of such a scenario, the first thing that would set in is shock and if you have not considered what is your essential spending and the bare minimum you need to keep the morale going, you will be at a loss for what you should do.

By having a baseline and a very conservative budget, you will know what the areas are to stop spending on when something hits.

For example, in your baseline budget, you allow yourself to bring your family and extended family out for a good meal at a good restaurant every weekend. In your very conservative budget, instead of every weekend, you would bring the extended family out once a quarter, and for your family, you would eat out once a month instead.

For both the family and extended family, you will reduce the grade of the eateries chosen to one where the food is value for money.

Cut on the areas that you value less or are lower in priority.

Still spend on the areas that could not be cut or are in higher priority.

Consider critically the grade of the goods and services you will spend on.

This would improve the morale and still maintain your mental capacity.

If you already have something like a very conservative budget, consider reducing some of the areas from a standard budget to a point closer to the very conservative one.

The measures provided by the government will help the lower-income family but if you are in the higher income or net wealth spectrum of Singapore, the significant impact will come from optimizing your spending.

2. Have An Emergency Fund.

Mr. Heng Swee Kiat said that the deep reserves which Singapore has built up over the years have allowed the government to focus on the appropriate areas to allocate their cashflows instead of worrying about the damage brought about by these events that they cannot control.

As a family, having a liquid pool of money in an emergency fund would allow the family to buffer about three months to a year of shock to the annual expenses.

3. Consider Carefully When Deciding To Take A Loan.

Given the climate, taking on loans may reduce the margin of safety on your finances.

Ideally, the annual debt repayment to your after-tax income should be less than 30%. Should one spouse lose the job, your family should be able to service the debt repayment with one income.

4. Enhance Your Earning Potential To Retain, Adapt And Grow.

For many accumulators or those of you who have not amassed an appropriate net wealth, your family’s income is the most important. It allows you to pay for your current expenses and provides the free cash flow for you to increase debt repayment, build your children’s education fund and your financial independence.

Take advantage of the SkillsFuture credit to find complimentary training to enhance your earnings potential. If you feel strongly about switching to a different industry or domain, consider going for some training to start building side competencies.

Make yourself indispensable at your job by being focused and adding value at work. Take on the things your peers may shun.

Most of all, to do all this and function well, you must be healthy and fit. Ensure that you eat right, de-clutter your mental thoughts and focus on the important areas, and exercise frequently.

5. Invest For The Long Term. History and Experience have taught us that there will always be challenging times. The important thing for all of us is to emerge from tough times like this unscathed, if not stronger.

If you have committed to long-term goals such as your financial independence and children’s education, continue to fund them.

For our client’s portfolios, they are diversified across 7,000 businesses around the world, across 180 high-credit rating bonds. This diversification allows them to reduce the impact of weakness in certain regions in the world and be able to capture the regions where there would be relatively better growth, reducing single-country risks.

There will be a lot of noise along the way that confuses us and increases our anxiety levels. They serve to throw us off our wealth accumulation journey towards our goals so that we cannot amass enough wealth for our financial independence and children’s education.

The government has committed to match every dollar of cash top-up made to CPF Retirement Account (RA) under a new Matched Retirement Savings Scheme.

You can consider taking advantage of this by topping-up your CPF RA account if you are between the ages 55 to 70 and have not hit your CPF BRS.

Summary

The government usually puts out a prudent, conservative budget, targeted to the long-term and short-term needs of Singaporeans. 

The underlying theme of this year’s budget is to stabilize the economy, which is suffering from productivity issues, a reversal of globalization, and a virus that is severely reducing commerce activities both locally & overseas.

Packages are now rolled out to alleviate SME’s challenging conditions, to try and retain Singapore workers.

As a family, this is a time to evaluate your resilience.

Be aware of the government incentives and measures so that you can take advantage of them. We have also provided some different ways in which you can shape your personal finances to provide your family with greater resilience. (For our clients, if you wish to review your personal situation, please do not hesitate to contact your Client Adviser).

Experience tells us that all these challenges shall eventually pass. If our finances are in order, it allows us to emerge from these challenging times stronger.

This article was first posted at Providend, Singapore first fee-only financial planning firm. No commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

I noticed fewer clients coming in during this period. An adviser told me a few clients have canceled their appointments coming in.

This Coronavirus feels like a seriously big hit to the businesses depending on local and overseas consumption, as well as certain services.

Singapore’s economy is likely to report some really shitty numbers. Singapore is a very open economy. We depend on the export and other countries buying what we created.

The way to alleviate this problem is to have adequate human isolation for a period. This killed not just exports but also local commerce.

I was commenting to Caveman that market prices seem to have discounted this period as a short term event and not of material consequence. There is no way the supply chain of the world are not affected in any way. Caveman shared with me that those small-medium enterprises will be cham because even in good times, their liquidity is going to be very tight. Now, without orders, and with limited cash-like assets, they will really feel it.

Workers will Face Even More Uncertainty if this Drags On

But the ones that I worried about the most are those workers who work for the SME. In Singapore, the biggest costs of doing business are rental and manpower.

While companies cannot do a lot about rental (associations have been asking for rent reduction), without business the best way to control the cost is to ask staff to take no-pay leave.

Cathay Airlines have asked 27,000 of their staff to take no-pay leave. Hong Kong Airlines cut 400 jobs. Asiana Airlines is also doing something similar.

If there is no business, then it makes a lot of sense to reduce variable labor costs. Workers in SME will be the most hit.

And I wonder whether you will be shocked to be put on no-pay leave.

The shock factor for each of us in these situations depends on the perception in our brain how safe the situation is versus how swift, how sudden, how improbable the incidents are. Those working in government sectors, or big MNC will be the least susceptible to this.

It will feel like an annoyance that they have to live with some annoying business continuity plan (BCP) inconvenience.

But for some, they are living from paycheck to paycheck.

They cannot have a period where there is no cash flow coming in. This is a nightmare for them.

I felt in 2019 and 2020, these incidents will make some people question whether it is a good idea not to have any safety buffer, or whether the safety buffer they have is an illusion.

The Misconception of the Role of Your Emergency Fund

Most people will search for authority to tell them how much they should have in their emergency fund, without thinking critically about how an emergency fund aids them in their life.

Experts tell us we should have 3-6 months of expenses saved up, compartmentalized in liquid amounts for “emergency”.

Some of you who wishes to optimize will ask the questions:

1. Can I invest my emergency fund?
2. Can I just have 1 month or 12 months?

The answer to that question is that: It depends.

You need to frame an emergency well.

When it comes to problems you faced in this world, they can be classified in the following 3 categories:

1. Known knowns. Shit you know will happen
2. Unknown knowns. Shit you don’t know will happen but more experienced or knowledgeable people would
3. Unknown unknowns. Shit everyone likely do not know will happen. Think 4 improbable events all happening at once. Or a meteor hitting Thailand.

Civil unrest is #2. Coronavirus is #2. These two add up is probably #2.

We have seen developing countries having unrest before and some of the risk-conscious folks would have explored that when events like these happen in Singapore, what would be your rough course of action. You could also determine if your plan sound.

Some of us went through SARs before. It hasn’t happened for some years but it is probable.

An emergency fund is to address #2 or #3. #2 and #3 are events that you have not encountered, that shocked you and money is needed.

How much is enough in our emergency fund for us to prepare for events such as this?

It is hard to say. The best is to have as much as you can!

The investment or financial dilemma is that if you put all your money in liquid assets, the returns are low and there is an opportunity cost to holding 100% of your net wealth in liquid assets.

The answer is therefore 3-6 months of expenses. If an emergency needs more, liquidate some longer-term, volatile assets.

Liquidating your emergency fund sounds very irresponsible and what we should not be advocating, but if you think about it, an emergency is an emergency because your life is impacted!

For example, when you are put on no-pay leave and there is no income coming in, there is a real urgency to ensure you can tied through this period.

The concept of an emergency fund is to have a sinking fund for the improbable. But your sinking fund might not always be enough and it’s ok.

It is better to have some sinking fund than nothing. This sinking fund allows you to minimize life disruption.

If you understand the above well, you would know that in some situations, you have to break the cardinal rule of selling your investments.

For some emergencies, you might need to break the cardinal rule of having to borrow money!

What Most Misunderstood About Their Emergency Fund

Some people use their emergency fund to plan for #1. That is not an emergency. That is a saving goal of events that is less probable.

For example, ff you know your boyfriend always gives a last-minute ultimatum that both of you need to go for a quick holiday that is not an emergency.

Save up beforehand for vacations. It will happen soon enough but you just do not know when.

Or that your job is volatile. Some months you will bring in less money. It’s the nature of your job. You should have worked out a system to smoothed out the money aspect. (You can read my article on how freelancers should manager their money)

At the end of the day, even a 2 year worth of expenses saved up may not be enough for some medical cases that your loved ones suffered (you cannot use critical illness insurance to cover because it is not on you but another person)

We can only try to do our best.

Wargame What Your Family Would Do If Shitty Situations Occurs

Having sound financial planning is important but being resilient is further than just managing the tangible money that you have.

The way to build resilience is to first confront the situation we most feared rather than lie to ourselves that this would not happen to us. That we have moved on passed that.

In army exercises, the higher-ups put commanders through a training exercise to see the commanders and their men’s reaction to certain scenarios that are both probable but rare.

The commanders work in an environment that would allow them to be vulnerable to any inadequacies of their current capability, be aware of certain nuances that they would have glossed over normally.

Another name for this is called red-teaming.

Red-teaming can be applied to businesses as well as our lives, not to mention our finances.

Some of the scenarios that you could work through are:

1. One spouse losing their job for 6-months, 1-year, 3-years
2. Both spouse losing the job
3. One spouse being disabled
4. The family won $1 million dollars

The result of going through these exercises is that some of my more thoughtful friends ensure that their mortgage could be paid with one of their income, have 3 years of mortgage in their CPF OA, one spouse works in a bond-like company one spouse in an equity-like company.

The best output I feel you should have is a different set of expense budgets.

You would have:

1. one budget for how you are spending now
2. one budget for how you would spend in these scenarios, and the actions necessary to get there

For example, if something were to happen, the grade of food, products that you will buy will change. Some expenses will be cut down. Some expenses cannot be cut down.

By going through red-teaming, you would know in the event of these situation, whether you could live on a smaller budget. For some who cannot, then you would really need to build-up large buffers.

Here are some resources on this topic:

1. Art of Manliness Podcast #564: Assault Your Assumptions Through Red Teaming
2. Radical Personal Finance 194-You Just Got Laid Off. Here’s What To Do Next!
3. Investment Moats: War-game the Scenario of your Salary getting cut from $9500 to $7000 BEFORE it gets cut

Summary

I feel that as a country the biggest opportunity from this crisis is to have a profound change in how we look at cleanliness, preparedness, sufficiency.

As an individual, the biggest opportunity may be to realize how vulnerable our situation could be, even though we earn a good income and everything looks optimistic.

You would not value your emergency fund if you have not gone through one (and I hope you can learn that value through my blog or some other way instead of finding out through a situation you have to experience).

There will be many that look at how I would think about wargaming in life as a very paranoid behavior.

I will let you tell me if this is really paranoid or there is real value here.

Those of my friends who been retrench, and could not find a job for 1 year would agree that in our plan, there is always a virtue of being able to live smaller than we usually would.

I think many areas of commerce on the ground is crawling right now and we should expect some crazy support in the Singapore Budget this afternoon.

Whatever it is, everyone should be vigilant about their health and hygiene during this period. Let us hope we can emerge from this Coronavirus in one piece.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

My friends at Endowus Gregory and Sheng Shi asked me to make a comment about investing with CPF so this is my honest take.

I wrote a post five months ago going through a Morningstar research why fees of funds in Singapore could not be as competitive as some other countries. I explained that Endowus is probably the first ROBO to provide an offering to invest your CPF.

The majority of the competitors were more focused on cash investment because that is the low hanging fruit. And that is where most of us should have our assets (I think).

SRS account was the second-lowest hanging fruit. Now we see almost all ROBO offering it.

As far as I understand, Endowus is the only one who offers it right now. When it first launches, a lot of my blogging friends were very hyped over it. Finally! There is a possible viable option to get a greater expected return than what we are currently earning!

My CPF Philosophy

Before I go on any further, I think it is better I let you in on how I look at CPF to frame the discussion going forward.

1. The CPF OA Rate of 2.5% and CPF SA Rate of 4.0% is very hard to beat for a lot of people
2. The CPF SA Rate is not so permanent and subjected to change
3. Transferring from CPF OA to CPF SA allows you to easily increase the rate of compounding by 1.5% a year. This is provided you have done your financial planning well. Don’t fall into the trap that you transferred all to CPF SA, only to realize you need to cough up mortgage and student loan payment using cash (when you do not have the intention to)
4. I believe folks should learn the skill of investing early and learn to live with uncertainty or volatility in their wealth. In the spectrum of return and volatility, you can move your wealth in your CPF up the spectrum, taking on more volatility and uncertainty in the short run, in exchange for the chance for higher returns
5. You need to get comfortable living with some volatility in your wealth. Sooner or later, a large part of your wealth will need greater returns so that they can meet your financial goals, and so that your retirement income will last. Human beings don’t wake up overnight comfortable in putting 80% of their net wealth into some assets they do not have experience with. This has to be built up over time.
6. If you treat the CPF portion as your bond allocation, and that you have invested in equity-like investment options outside of your CPF, have experience with it, are trying to get comfortable with it, then it is OK. That is sensible
7. When you get comfortable with investing and can see yourself earning 4 to 10% return a year, your opportunity cost whether to invest your CPF or not is 4 to 10% instead of 2.5% to 4%. Putting your money in something earning 2.5% is costing you a lot of money!
8. I tend to take a balanced approach, having enough in CPF SA, enough in CPF OA, invest well with my CPF OA.
9. CPF monies augment my financial independence, not the other way

You might agree or don’t agree with me, and that is fine because we all live different kinds of life.

Do put in the comments if you wish for me to elaborate further.

Why Invest Your CPF OA at All?

I am going to tell you something startling: Some advisers managed to make a business out of advising clients to invest their CPF SA (which yields 4% a year) into an approved unit trust.

Basically, that is as close you can get to selling ice to Eskimos.

But why this question comes in the first place is that if the interest you can earn with your CPF OA and SA is more or less guaranteed, why do you subject your money to volatility?

I guess the justification that I will give you is time.

We only have one life, so we don’t have a lot of time to tryout and compound our money. If someone gives us 2.5% or 4.0%, we take it.

However, should your financial goal requires a larger sum of money in the future, what do you do?

You can accumulate more with your cash. Put my wealthy formula to work, get competent and accumulate more.

From the financial planning perspective, your investment choice depends on your time horizon and your risk tolerance. Your CPF is locked in for your retirement. For many of you, your time horizon is long and you cannot unlock the money in the short term.

Thus, it makes sense to invest and give your funds the opportunity to earn a greater return.

Gregory wrote a piece on why you should invest your CPF monies. Like a lot of his pieces, it tends to be data-driven. If you let people know you are evidence-based, best to show it.

A large portion of the article is the degree of confidence that, if you invest, you can beat the 2.5% a year rate.

There are a lot of data charts & tables that I like but I will pick out a few that stand out.

This table shows how successful each investment option is, to beat that CPF OA rate. Gregory crunched about 29 years of rolling returns data.

Since I am somewhat of a data nut myself, there are 348 1-year instances, 300 5-year instances, 240 10-year instances, 180 15-year instances, and 130 20-year instances. Basically it is not too narrow.

Each cell shows the percentage of success the asset could beat the 2.5%. If we look at Singapore inflation, there is a 24% chance in 3 years, Singapore inflation can be more than the CPF OA, but largely over 20 years, CPF OA can beat Singapore inflation.

There is almost zero chance your Singapore savings rate can beat the CPF OA. The interesting data is the Bloomberg Barclays Aggregate Bond Index. The rolling 3 to 5 years upwards show high success in beating CPF OA.

To measure the equity portion, Gregory used the MSCI All Country World Index (ACWI), World and S&P 500 (the difference between ACWI and World is that ACWI contains a small portion of emerging markets). In the short term, there are some instances where the annualized return is below 2.5%. But in the 20-year rolling return, almost all is greater than 2.5%.

Personally I like the balanced index for its balance between return and volatility. Straight off the 1-year returns, you have a relatively high success rate.

Here is another favorite rolling returns table. It breaks down the average, best and worst return for each investment option.

You would appreciate knowing the average inflation is 1.6% a year instead of the 3.0% a year a lot of people talked about.

The BBGA is particularly impressive in that the worst rolling 5-year return is 2.18%. Instead of investing in an equity heavy portfolio, we could move up the volatility spectrum slightly and invest in a corporate investment-grade bond fund to beat the 2.5%.

You will also observe that in the short term the worst case is depressing but as you hold it longer, the worst-case gets better.

Your returns gets closer to the average.

Last chart. It shows the monthly rolling returns versus the 2.5% CPF OA rate. The red area is the monthly rolling instance that failed to beat CPF OA. Observed that as you hold on it longer, the red portion disappears.

You can see a lot of instances where the returns are 50% greater than the CPF OA rates.

Suffice to say there is a lot of opportunity to do better than 2.5%. I knew that already. It is time for you to discover that.

The Problem with Investing With Your CPF

While the theoretical returns presented look good, the problem has always been the execution.

As an investor, we could achieve higher returns with individual stocks. However, we can only invest 35% of our CPF OA in individual stocks listed on the SGX (and it is not all of them! Only a selected few).

To compound this problem, the number of quality companies that you can invest and hold for the long term in Singapore is dwindling.

Here is a summary of the different investment options available to you to invest your CPF OA and SA monies:

Do note that the first $20,000 of your CPF OA and first $40,000 of your CPF SA needs to be set aside and cannot be invested.

Ideally, Singaporeans can invest in a low-cost global balanced fund or a low-cost global equity fund. If you look at the table, there is tremendous opportunity to invest all your CPF OA in unit-trusts and ILP that are low cost.

However, that is not possible because… unit trust and ILP tends to have a high sales charge and trailer fees. In March 2018, the Ministry of Manpower (MOM) tried to bring this inline by completely removing the sales charges.

MOM also capped the total wrapper fee that firms can charge from 1.5% a year to 0.40% a year.

This helped to a certain extent but they completely missed out on abolishing or capping the trailer fees. The trailer fees are a big cost component and as long as there is one avenue, there is a way to be abused.

Which brings me to Endowus’s offering.

Invest in 6 Different Actively Managed Unit Trust Portfolios with Your CPF OA

Through Endowus, you can invest in 6 different portfolios with your CPF OA.

These 6 portfolios have different volatility and return profile:

1. Very Aggressive
2. Aggressive
3. Balanced
4. Measured
5. Conservative
6. Very Conservative

For those who have lower risk tolerance and shorter time horizon, you can choose the portfolio on the lower spectrum of the risk profile. For those with a longer time horizon, you can choose the portfolio on the higher spectrum of the risk profile.

The minimum starting investment is S$10,000.

These portfolios are currently made up of actively managed funds:

1. Lion Global Infinity US 500 Stock Index Fund (US500)
   • Equity
   • Feeder fund into Vanguard US 500 Index fund
   • 0.68% expense ratio
2. First State Dividend Advantage Fund
   • Asia Ex-Japan Equity
   • 1.71% expense ratio
3. Natixis Harris Associates Global Equity Fund
   • Global Equity
   • 1.71% expense ratio
4. Schroders Global Emerging Market Opps Fund
   • Emerging Market Equity
   • 1.68% expense ratio
5. Eastspring Singapore Select Bond Fund
   • SGD denominated / Forex bonds hedge to SGD
   • 0.62% expense ratio
6. Legg Mason Western Asset Global Bond Fund
   • G10 or SG countries bond
   • 0.87% expense ratio
7. UOB United SGD Fund
   • Money Market Fund
   • 0.67% expense ratio

As an investor, you cannot choose which of these funds go into your portfolio. You will invest based on the portfolio. You can, however, invest in multiple portfolios.

The Cost Structure

Here is how much it will cost you to invest with Endowus’ CPF Portfolio:

1. Endowus charges an annual management fee of 0.40% for their CPF & SRS investment, which is lower than the 0.60% fee for cash
2. No platform fee
3. Endowus will rebate all the trailer fees earned as part of the expense ratio (seen above). More on that later

In my previous article, I have explained that a cost leakage that is seldom mentioned is the trailer fees. Suppose Natixis Harris Associates Global Equity Fund charges you a 1.71% in expense a year. Out of this, 0.75% of this is paid back to the distributor (can be a platform like FSM, Dollardex, Poems or a bank).

Endowus wishes to weed out these trailer fees and thus they will rebate this to the investor.

Kah Kiat from Risk N Returns has a good write up on Endowus’s offering. He has a good table where he broke down the trailer fee cost for the funds and the portfolio. I cannot stand the color so I decided to format one on my own:

The trailer fees in red show the fee embedded in the expense ratio that is paid to the distributor. Endowus will rebate that to the investors. In the last column, you can see a summary of the total annual all-in expense that an investor will incur.

While some of the residual expense ratios for the funds still looked high, when you managed it in a portfolio, the expense is more rationalized. As a comparison, if you invest in Endowus’s most aggressive portfolio with cash in the Dimensional funds, the all-in expense is 1.03%, which is not so far from this 1.18%.

The Cost Advantage of Endowus Partnering with UOB Kayhian

In order to invest in any investment with your CPF, you will need to engage one of the three big banks in Singapore (OCBC, UOB, and DBS) to open a CPF Investment Account (CPF-IA).

What you may be less aware of is that there is there are transaction fees and recurring maintenance fees for making use of the banks’ services.

The table above summarized the additional transaction fees charged by the CPF IA account administrator and if you go through Endowus.

Endowus make use of UOB Kayhian as their broker platform who has achieved CPF Investment Administrator status. This allows UOB Kayhian to offer clients of Endowus lower costs.

Normally, if you invest in one Endowus portfolio (which is made up of at least 5 unit trust funds), the other administrators would levy 5 separate maintenance fees and transaction charges.

If you make use of UOB Kayhian, you deal with only one transaction and service fee. The recurring fee savings would be $36 a year. The transaction fee savings would be more substantial if you dollar cost average often.

The OnBoarding Experience

There are a few bloggers who have written about the onboarding experience and you can check them out here:

1. Endowus Review – Best CPFIS Product?
2. Endowus CPF/SRS Review
3. Investing my CPF OA with Endowus

#3 probably gives you the best onboarding experience. #1 will show you some growing pains.

What I do understand is that if you have not created a CPF IA account (which you need), the process can be a bit arduous:

1. Complete a CPF Self-awareness Questionaire
2. Open your CPF-IA account with UOB (if you have one you should be able to skip this)
3. Linked your CPF-IA to Endowus

You just got to be a bit patient.

The Elephant in the Room

If there is a problem with Endowus’ CPF offering is that people will ask the obvious question: What is with all the active funds?

I think some people are asking but not a lot. To be honest, the majority of the wealth-builders looking for solutions do not see the funds used as a problem. They may likely believe that since these funds are CPF approved then they are the superior funds.

But to many, Endowus have shaped their philosophy to be close to being evidence-based, making a strategic allocation, buying and holding.

Using active funds seemed… uncharacteristic.

Personally, I think this is a reflection of how broken our CPF investment scheme is, then Endowus carrying out actions that go against their original philosophy.

There is only a certain set of funds that are CPF OA and SA approved, so the selection is very limited. There are certain criteria to meet in order to be a CPFIS approved fund, chief among them is a lower expense ratio (less than 1.75% a year). Many of the funds could not fulfill what I believe is a low hurdle.

The funds that we believe are better (Lion Global wrapped 3 Vanguard funds into the Infinity series of funds) are not CPFIS approved. There are not a lot of physical, liquid global equity and bond exchange-traded funds around.

Many investors paying attention to this space would have hoped to invest in Dimensional Fund Advisors’ unit trusts with Endowus.

I didn’t ask Endowus about this but based on what I can gather, that… will take some time.

The play (my guess) from what I can guess is to provide the most viable solution for CPF investors first. Once Dimensional funds are available, it will be much easier to get existing onboarded Endowus investors to switch to the Dimensional funds.

So What is the Risk with Active Funds?

There are enough people talking about active unit trust without having invested in one.

My mom’s funds and a part of my CPF are in actively managed funds.

The biggest problem with active funds is the misdirection that you get. You observe that the global bond or equity index moved up 12% the past six months, and you expect your fund to do the same thing. However, it doesn’t. Sometimes it did better, sometimes it did worst.

Active fund managers have to make a judgment call to be in more cash, concentrate on a few stocks.

Research shows:

1. Active funds underperform their index
2. Funds that did well (to be in the top quartile of their category) have a hard time trying to remain in the top quartile.

What is not often mentioned is that… an underperforming fund may still beat a 2.5% CPF OA rate over time.

But in summary, when you select an active fund, a lot of times all you can do is pray that Endowus have picked the fund that managed to keep up with the index.

Summary

We start this article by asking whether you should invest your CPF OA at all.

Mathematically speaking, there are good justifications to do that.

However, financial planning wise, the decision is more complex. Many Singaporeans prefer to use their CPF monies to service their mortgage. Then, they will upgrade to a bigger place and that will require more CPF OA.

Given this kind of potential cash outflow, it makes them very resistant to commit to long term retirement investing.

CPF OA investing is suitable for those who have used enough of their OA monies to pay for their mortgage, are in their late 30s, ready to grow their CPF for retirement income.

Endowus has worked within challenging cost and available fund constraints to create strategic portfolios suitable for investors with different risk tolerances and time horizons.

Your total all-in cost is around 0.86% to 1.18%. That sounds like a lot but the next best alternative which is to invest in unit trust with DollarDex, Fundsupermart (no management fee) will average 1.50%.

A cheaper solution would be to invest in a 2-fund portfolio of ABF Bond fund and STI ETF. However, that is very Singapore-centric and if you are looking to be less home-based bias, that might not do.

If you are looking for a CPF investing solutions, do check them out.

The problem with CPF Investing is less of any providers but more of how the governing people structure it.

If we go by the recent HDB Built-to-Order trend, it might be the case that future central BTO will be smaller in sizes.

I observed that the latest HDB build to order sales launch was out and it seems rather peculiar that there were no launches in matured estate that is bigger than 4-room.

The biggest size flats for Toa Payoh Ridge and Kim Keat Ripples is 4-room. The sizing of the flats is deliberate and HDB should be under no constraint in their sizing.

Here are some of the past year launches:

My eyes were not playing games with me. But if you were to be strict about it, HDB is still releasing 5 RM HDB flats for a matured estate like Tampines.

A possible explanation is that they are starting to rationalize the supply of the new flats in these areas that are more central, and more in demand.

This would cause some frustration for newlywed young couples. For a long while, my friends prefer to stay in 4 RM or 5 RM HDB. They even lament that 4 RM is too small.

I always think that the sweet spot between affordability, cleaning, enough space, government subsidies is the 4 RM HDB.

Yet, when I spoke to Heartland Boy recently, you realize that there are some nuances that you will struggle to accomplish with a 3-RM flat. Heartland Boy stayed in a BTO similar to the new BTO above and has one daughter.

If you wish to create a better long term sleeping practice for another child, perhaps having only 2 rooms will not be very conducive.

I do get a feeling that there might be a push to rationalize affordability in these central estates.

I was initially thinking the government is saying: “If you want a bigger, yet central flat, go for those older ones. I have already given you the grants to make it more affordable. The leases are shorter but it will fit your needs.”

In matured estates, there should be ample supply of existing 3 RM and 4 RM HDB.

If this trend continues, it may be bad news for some couples. I know of folks who cannot stand living in a place that was inhibited by someone previously. It is damn weird but if that is the case, you would either

1. get a new BTO further
2. get a new Condo instead

You got to pay a higher cost.

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