CPF Investment Changes

Just an update here. There would be some changes to the investment scheme for CPF. Most notable is the fact that the first $20k in your ordinary account can't be used for investment anymore with effect from April 2008. However, any current standing instructions would not be affected.

For more information, you can refer to Ministerial Statement on CPF reforms

If you currently have any regular savings plan for your CPF-OA even though your CPF-OA does not have the minimum amount of $20k, you will not be affected by the rule. This means that, for example, if you currently have $10k in your CPF-OA and you manage to sign up for a regular savings plan to invest in a unit trust for $10k initial sum and $5k annually (Assuming your yearly contribution to your OA is $5k), this means that even though you do not have $20k minimum in your OA, there will still be deduction of $5k from your OA for the regular savings plan.

Of course, the first $20k in your CPF-OA will earn an additional 1% interest based on the prevailing interest rate that is tagged to some bond or T-bills returns.

Glossary of terms:
CPF-OA -> CPF Ordinary Account
T-bills -> Treasury Bills

How to start investing

The first question a person asks is usually when to start investing and how to go about investing. Usually it is impossible to create a diversified portfolio when you do not have adequate savings but it is still good to start investing with small amounts. However, the basic concept of which group of investor you are in still applies.

You should start investing as long as you have at least $1000 after setting aside part of your savings for rainy days. Next, you should choose a unit trust distributor like the following:

1. FundSupermart
2. Philips Capital Poems platform

Disclaimer : I do not make any commissions from recommending them and should you have more platforms, kindly send me comments to add to these list.

The above is for DIY funds management where you buy and sell funds using the platform provided. However, if you are not IT savvy or are busy, you could engage with a personal banker or an insurance agent. Do note that when you are dealing with an insurance agent, you need to make sure that you are buying funds without any insurance options tagged to it, as premiums no matter how minimal are still considered costs (This is one of the mistakes I made when I started) that offsets against your profits. Forget anything the insurance agent tells you about claiming tax relief because under IRAS, insurance relief is bundled with your CPF relief (If you had capped your max CPF relief, it doesn't help and moreover, it's always better to separate insurance from investments). Do also note that for DIY, the sales charge is usually much lower than the sales charge quoted by the banker or insurance agent which is about 1.5-2.5% vs 5-5.5%.

For a conservative investor, you should start with bond funds, for "fence" investor, you should pick a global equity fund while for aggressive investor, you should pick a higher risk fund like single country fund (For more information regarding which group of investor you are in, kindly read my previous posting). Alternatively, there are also portfolio funds that are available like balanced funds or progressive funds according to their allocation to bonds and equities.

You can also have a regular savings plan arrangement with your banker or your distributor to buy funds either monthly or quarterly. For this, you would need to come up with an initial sum before commiting a fixed sum of a minimum of $100 every month regularly (If you are interested in monthly payments) to buy into that particular fund. In this case, you are using what investor called the "dollar-cost averaging" approach to grow your money. This approach allows you to average out the costs of the fund and tends to provide you appreciable returns with lesser risks over a long period of time.

For my future posts which would sadly be weekly unless I have more to add, I would provide some analysis of the markets and perhaps recommend some funds available although my focus tends towards a more aggressive approach.

Investor Categorization

In this post, I will provide a general way of categorizating the investor and recommend basically what type of funds you should invest in.

I will broadly classify investors into 3 groups and allocate the ratio between bonds and equities accordingly. The first group is the conservative group where you basically have low risk capacity, longer time period (usually 3 years or more) to invest and requests that your returns to be around 5-8% . For this group, normally I would recommend that you put 80% in bond funds which usually gives you a return of about 6% annually and the remainder in a broadly diversified fund like a global equities fund that returns you about 10% annually. The bond funds do not fluctuate that much, accounting for one of the lowest risk financial tools available. The global equities fund is usually medium risk in nature but allows exposure to a growing economy where over a long run, this fund usually offers good returns for a reasonable amount of risk. However, to partake in a growing economy, this group can adjust their portfolio to having 60% bond funds and 40% equities fund.

The second group is the "fence" group as they want ok returns which is about 9-15% returns, is willing to accept some risks of losing approximately 10-20% of their money but only wish to tie up their money for no longer than 3 years . This group should allocate 30% to bond funds, 50% to global equities fund and another 20% to higher risk single sector/country fund. The higher risk funds allows the investor maximise returns in a growing economy while for bond funds and global equities fund, the explanation are already as discussed under the conservative investor category. The investor can swing their portfolio to 10% in bonds, 60% in global equities and 30% in single sector / country funds to maximise returns in a growing economy.

The third group can be termed as the aggressive investor where they only accept high returns of above 15%, is willing to take high risk of losing approximately up to 30-50% of their money and is only willing to tie up their money for a short period like 1-2 years max. This group should delve purely in equities, 50% in global equities and 50% in high risk single sector/country funds. To maximise returns in a growing economy, they can put 30% in global equities and 70% in high risk funds.

Of course, investors can opt for a more diversified portfolio even though they are aggressive like putting 10% in bond funds but it is not advisable for the reverse like putting 10% in high risk funds if you are conservative. This is just a rough guide as each investor might although fall in these broad categories but their risk appetite might be bigger and thus allocating heavier weightage to equities. Note that there is no such thing as low risk, low period of investing and yet high returns. Investing can be summed up by this formula where Returns = Time period of investment + Risks taken.

Personally, I'm started out by buying a progressive fund where 80% are in equities and 20% in bonds, this nets me an average of 10% returns for the past 2 years annualised. Recently, I had shifted a major portion about 60% of my savings to single country funds where I'm enjoying about 30-40% returns (Top half of 2007, I cashed in a returns of approximately 10% after investing for 3 months and currently I'm enjoying approximately 15% returns which I had not cashed in) if you annualised the returns.

Note that my guide is not exactly comprehensive and serves as a rough guide to novices. I can't say I'm exactly the best as I know people that enjoys 100% returns. I don't speculate exactly when is the fund's lowest point of that year but just buy in to keep unless some bad news are brewing. My next post will look at how a novice investor can start to invest and where to invest

Knowing yourself

Investment is basically to put your money in financial instruments to make them work for you, be it putting your savings into stocks, into fixed deposits, funds etc. Note that just leaving your money in a savings account would not do much for your money.

Most people that have no clue about the various financial instruments are always worried about one thing which is basically the risk involved or in layman's term -> "Losing your money". Thus, we would need to reduce our risks to maximise returns.

First of all, the investor needs to ask himself/herself if he/she has the time required to do research as after all, if you are planning to go into stocks, you would need to study the fundamentals of the company. I do not advocate contra as that is more like short term punts rather than long term investment. If you do not have the time, then it would be better if you invest in funds instead as the fund manager would make decisions on what equities to buy, and in addition, it also reduces the amount of risks you are exposed to.

Secondly, what kind of an investor are you? We have to look at the kind of returns you need like 20% of the sum of money put in and the duration of time you can put your money in. Normally, I would set the duration as a minimum of a year although in actual fact, most mid term duration is regarded as 2-3 years. Most funds will return positive returns if you leave it alone long enough for like 10 years so that it is almost like guaranteed capital protection.

An investor would need to understand that it is impossible to earn more than 10% returns in a year without any risks involved. However, the longer the time period, the less risk of losing your money there is. Obviously you still need to have a general knowledge of what's driving the global economy or what's hot. If you would like a high return, then when the fund is volatile and manages to wipe out 20% of your capital, would you be worried and sell off the fund immediately? Risk aversion also plays a huge factor of whether you would maximise any returns.

Thus for a novice investor, the returns, the time and the risk aversion determines what sort of investor you are. If any bankers or agents approach you and just recommend you any funds without determining what sort of investor you are, you can be sure that the agent is just thinking of his/her commission rather than your best interests. Obviously some of you might not be sure of where and what to invest in but as a safe gauge, the more conservative you are, the more your money is in bonds and money market. The more aggressive you are, the more your money is in equities. Your risk profile is always frequently changing, thus, any banker who did not do any updates on you is just not doing their job.

In my next post, I would discuss on how to determine what type of investor you are based on just 3 factors, namely risk, time and returns and recommend the types of portfolios that might be good for you.