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Doctor Wealth loves CPF/ Invests in STI ETF

In CPF, ETFs, Financial competency, Financial planning on 26/02/2016 at 2:28 pm

Here’s something that I dug up from my archives of unused stuff. This praise of CPF appeared in 2014 at https://www.drwealth.com/2014/10/20/3-steps-retire-singapore-like-bogle/?utm_medium=DISPLAY&utm_source=OUTBRAIN&utm_campaign=NOV2014&utm_content=ARTICLE7_RETIRE

“I have been blessed with a fabulous defined retirement plan”

Like all working Singaporeans, I contribute to CPF (Central Provident Fund), our mandatory national social security plan. CPF is made up of 3 separate accounts: Ordinary (OA), Special (SA) and Medisave (MA). Each month when I am working, I make the maximum possible contribution to CPF and eventually when I retire, CPF will pay me back a monthly annuity income. My OA had been used to pay for my housing mortgage, but SA remains untouched, and my MA pays for medical insurances.

Each year, I also contribute the maximum $12750 into my SRS (Supplementary Retirement Scheme) account. This voluntary contribution must be done with cash and provides a tax relief that reduces my tax bill. SRS is a form of forced savings as early withdrawal from the account attracts penalties.

Unlike the CPF that pays a risk free 2.5% to 5%, the SRS pay a very low interest, so I invest my SRS funds for higher yields. I sink my SRS money, using a RSP (regular savings plan), into the STI ETF (Straits Time Index exchange traded fund). What happens is that by the end of each year, I will contribute the maximum $12750 into my SRS account, and in the following year after my contribution, $1000 will be deducted every month automatically and bought into the low cost index fund, the STI ETF. In this way, the process is automated and I avoid timing the market too.

I treat my CPF as a form of bond, as it pays a decent risk free rate. The OA pays 2.5%, while the SA and MA pays 4%. There is an additional 1% paid to the first 60000 dollars. In the long run, with the magic of compounding interest, the amount in my retirement account can be significant. Contributing to my SRS gives me a tax saving and I do not actively manage my investment of the SRS money, as I feed them into the Singapore stock market automatically and regularly with a RSP. Together, my CPF and SRS plans will ensure that I will have 2 strong pillars for my retirement planning.

Re his faith in STI ETF, it’s clear that  Dr Wealth does not subscribe to the Econoist and FT (Too poor isit?). There have been some articles quoting research that indicates that shares may not be the best long term. Example: investment http://www.economist.com/blogs/buttonwood/2016/01/investing

As of February 2013, the longest period of negative real returns from US equities was 16 years. But it was 19 years for global equities (and 37 for world ex-US), 22 for Britain, 51 for Japan, 55 for Germany and 66 for France. Such periods are much longer than most small investors would have the patience to wait.

Another way of looking at the same issue is whether equities beat bonds over the long term; whether the risk premium is really delivered.

The answer is not really.

 

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  1. That’s only true if you do a large lump-sum investment, and don’t put any more new money in it. The volatility of stocks is actually good if you do regular investments over many decades. Which is basically what is realistic for ordinary working joes. For people who have millions or billions of dollars, most of their money is parked in treasuries or other safe sovereign bonds, with a moderate amount in investment-grade corporates and a smaller percentage in blue chips.

    The danger is mainly for those starting out in stock investing with a lump sum to invest. For these, they need to practise patience and ease into the market, and/or learn about market valuation. E.g. many people get excited near market tops like in 1996, 1999, 2007 and put their bank savings into stocks only to see it burn & crash soon after. Then they cut loss, and forget about stock investing again … until the next big bull.

  2. “What happens is that by the end of each year, I will contribute the maximum $12750 into my SRS account, and in the following year after my contribution, $1000 will be deducted every month automatically and bought into the low cost index fund, the STI ETF. In this way, the process is automated and I avoid timing the market too.”

    With reference to the above, may I know which monthly savings plan do you use? (ocbc, poems, posb, etc?)

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