Sunday, July 10, 2016

World War III : CPF Edition

Today's article is a little incoherent.

I was ill throughout the weekend and wanted to share some insights into the most divisive issue between financial bloggers, which is the tension between transferring CPF into the CPF-SA versus keeping the funds within CPF-OA and investing part of it into the stock market.

Unfortunately I was unable to really come up with a simple illustration which can adequately explains why bloggers disagree on this issue. The best thing I can say is that if you support the transfer into CPF-SA, you would fall into the left triangle in the diagram shown above. If you support the CPF-IS route, then you would fall into the right triangle. Depending on how you internally view the efficient frontier represented by the curve I drew, one triangle may be bigger than another which can lead to a contention between experts because we all hold different views on what the market is like in our heads.

This is why I suggest throwing away financial knowledge and ask ourselves whether we like the idea of eating the government, or we prefer to eat the financial markets. I would not think that one answer is better than the other.

I would just to address one point raised by the CPF-IS camp about whether they are confident of markets returning 8% every year on average in Singapore.

This is also an area of contention.

If you look at the historical returns of equity an asset class, it does indeed have a record of giving out 8-9% with a standard deviation of 20%. However, market growth will always be function of GDP growth and we are looking at a pretty slow rate of growth in Singapore moving forward for the next decade. If we apply the rule of thumb suggested by Nate Silver in the book The Signal and the Noise, a more conservative picture emerges as he suggests that market growth will taper to GDP + 2%.  This means that going forward, even a 6% return for owning equities would be considered optimistic in Singapore.

But I do know that I do not belong to either camp.

I transferred my CPF-OA to CPF-SA and maxed it out early in my life before I even started studying the financial markets. Subsequently, I was able to buy my EC with both me and my wife's CPF and even have invested substantially in CPF-IS. My reserves in CPF-OA can still last me another 4 years before I need to top up my OA with my dividends.


  1. I belong to CPF-IS camp.

    I only top up from CPF OA to CPF SA once and then realizing ... that I am determined to be successful retail investor. The CPFIS is activated only after I have depleted my cash war chest and so far the return from CPFIS has been far better than cash as it is unlikely to invest anywhere near market top while earning at least 2.5% CAGR.

  2. Why do U need top up yr CPf-oa with dividends?