How do I invest CPF money in Permanent Portfolio?


CPFIn Singapore, the Central Provident Fund (CPF) is a compulsory comprehensive savings plan for working Singaporeans and permanent residents primarily to fund their retirement, healthcare and housing needs.

Investor first need to be aware of some rules relating to CPF money investment. You are allowed to invest 100% of investible Ordinary Account money in STI ETF (ES3), 100% in Singapore Government Securities 30-year Bond (PH1S) that trades on SGX, 100% on Unit Trusts/Mutual Funds, and 35% on stocks. You can invest only 10% of investible Ordinary Account money in UOB Gold Savings Account and Gold ETF (O87). The first 20,000 dollars in Ordinary Account cannot be used for investment purpose. Hence for gold, this makes it impossible to invest 25% gold with CPF money, and may make it difficult to rebalance gold if we were to allocate only 10% gold instead.

The first method is to invest CPF money with 30% in stocks (ES3), invest 30% in SGS 30-year bond (PH1S), leave 30% as cash in CPF Ordinary Account, and 10% in gold instruments. Second method is to create a CPF Portfolio consisting only 33% STI ETF, 33% Singapore Government 30 year bond, and 34% cash earning prevailing CPF OA interest rate – this method is easier and more cost effective to rebalance and maintain, and has performed almost as well as the first method in last 10 years, with about 1 % point diference in average returns – disadvantage is that this second method does not have any gold protection. Alternatively, you can plan to pool together your cash savings and CPF money and treat them as one, meaning, allocate CPF money among cash, STI ETF stock, and 30year bond, and allocate cash savings for gold, STI ETF and 30year bond, so that in total you have 25% of each asset.

If DIY investing using above methods is beyond your capability to learn and do, and you have no choice but to invest CPF money in unit trusts or mutual funds through the help of your financial agents, then it is my opinion you will be better off sticking a few rules about unit trusts. Before that, I think it is almost impossible to implement Permanent Portfolio with unit trust due to lack of capability to invest directly in gold commodity and pure long term government bonds unit trusts, so a bond/stock unit trust portfolio would be next best thing. My recommended unit trust investment rules for new and unexperienced investors are:

  1. If you invest only in one unit trust, choose a so-called ‘balanced fund’ that contains mainly both stocks and bonds components, with other asset types included if desired, so that the bonds can buffer extreme stock price moves and reduce overall price volatility – you can still be profitable if economic conditions are favorable, and you can have lesser heartache and smaller paper loss if economic conditions are not favorable. ‘Balanced fund’ with stocks and bond also usually recover from the losses due to economic downturns much faster than portfolio with pure equity unit trusts.
  2. If you invest with several pure funds, ensure you have a good mix of pure stocks and pure bonds funds, for same reason as in previous. An example unit trust portfolio will be 50% global equities unit trusts, and 50% global bonds unit trusts (higher percentage of government bonds is preferred). This has advantage that you can rebalance the fund back to 50% stock, 50% bond at the end of every year using existing fund or fresh fund, thereby taking profits internally on the profitable asset and buying the other lesser performing asset on the cheap. When selecting unit trusts, try to keep unit trusts yearly management fees as low as possible to improve your returns. To get lower yearly management fees, try to select passively managed funds as opposed to actively managed fund where fund manager try to adjust the fund componentsa and incur higher yearly fees.
  3. Avoid owning unit trusts based on emerging economies stock markets. Emerging economies may have high GDP numbers, but some research will show that fast economy growth does not equal fast stock market growth. I would suggest investing unit trusts that invest in developed market economies instead for more consistent stock market performance and less volatility.
  4. As new investor, do not own only pure equity fund in your portfolio, without bond funds to act as buffer. In buying only or mostly pure equity fund in portfolio, you are trying to ‘time the market’, and most people especially new investors, will fail miserably in market timing more often than not. Owning a ‘balanced fund’ or ‘balanced portfolio’ will give you higher chances of being ‘right’ and walk away with profit. If you wish to ‘market time’, you are a speculator and do so only with money you can afford to lose.
  5. Unit trusts contining gold mining companies act more like the stock market companies and not like commodities. Such unit trusts of commodity firms do not provide the same protection as direct investment in gold. Despite what your financial agent may say, such unit trust cannot replace the purpose of gold component in Permanent Portfolio.
  6. Investor should be ready to hold unit trusts for the long term, at least 3 years or more. This is to maximize chance for investment to overcome temporary downturn in economy and become profitable. Once you decide the length of time to invest in (hopefully 3 years or more), be prepared to ride through possible downturns and try not to let other people influence you take loss during a downturn. If you use a balanced fund with stock and bonds and lower volatility, then it will be easier to stick to your investment during a downturn. Remember to rebalance your portfolio every year whether in downturns or good times, especially if fund switching is free.

There are a few financial agent who really have in-depth understanding of how stocks, bonds commodity, real estates and cash functions in the economy, and have experience how to make a workable investment portfolio and rebalance for clients. For the rest, it is not hard to find financial agents who are really just unit trust sales people who just repeat what they have been told, who follows the crowd to talk about how their company can ‘market time’ and tell you when to buy and sell the unit trusts, and are clueless about how and what makes a good portfolio works. Market timing does not work for investment. Market timing is for speculators who have a totally different trading approach and work with money they can afford to lose. If you are investing and the cash is important to you, definitely you cannot use market timing approach. Remember that financial agents may come and go, and the quality of different agents differ. Listen to what your financial agent have to say and balance that against points 1 to 6 above, and I believe you will have a better chance to be profitable with unit trusts in the long term.

This article is contributed by Epps, reposted from singapore-permanent-portfolio.blogspot.sg. Epps invests in and blogs about the Singapore Permanent Portfolio.