Why should you invest your CPF savings

Between 1961 and 2024, Singapore’s average inflation was 2.6 per cent; and in the past four years, 3.9 per cent. This is the pace at which the cost of living is rising, faster than the nominal 2.5 per cent interest rate that the Central Provident Fund (CPF) Ordinary Account (OA) earns.

Put another way, the value of your OA balance in real terms, if left alone, has been declining by 1.4 per cent on average over the past four years. That is a sobering thought.

In 2023, as interest rates spiked, CPF members pulled an unprecedented S$5.9 billion into their CPF Investment Scheme (CPFIS) accounts. The total net amount withdrawn for CPFIS from 2022 to Q2 2024 is S$9.6 billion – the largest in CPF history. The total balance was S$27.2 billion at the end of that period, growing 58 per cent from end-2021.

CPF members have been smart to use their OA balance to earn higher interest rates offered by investment options such as Treasury bills (T-bills) and fixed deposits.

However, as these fixed-term investments matured and interest rates fell from their highs, we saw S$1.1 billion flow back into OA accounts in Q3 2024 alone. Since end-2019, when Endowus became the first digital adviser for CPF, there have been 81,000 newly created CPFIS accounts of members who have started investing to seek more than 2.5 per cent in returns.

Is investing a sure way to make or lose money?

While many remain cautious about investing their CPF funds, some are investing in T-bills. Still others have taken more risk and are rewarded with greater returns amid the stock market boom.

The S&P 500 index has risen roughly nine times from March 2009 to the end of last week. We have had 13 positive and three negative years since 2009. The Endowus flagship portfolio of diversified equities is an example of actual returns achievable with your OA; it has generated an annualised return of more than 10 per cent since its launch in 2019.

Investing makes your money work harder by taking some risk, with the expectation of a higher return. Risk is not a dirty word. It is, in fact, the only way we can get more than the meagre returns of a zero-risk bank deposit.

What are some of the alternatives to stocks? Lower-risk options include T-bills and money market funds with indicative yields of around 3 per cent, and short-duration bond funds with 4 per cent-plus yields. Investment grade or higher-yielding bond funds have duration and hence, interest rate risk. If interest rates fall, you may reap capital gains on top of interest income. But if rates rise, the capital value may decline.

Assuming stable rates, bond funds offer yields of 5 per cent or higher.

Getting the facts straight on equities

The equities asset class has been our greatest friend in providing great returns for many decades, but it is ironically the most feared by investors. It is always strange to us that people warn against investing their CPF but at the same time, urge others to invest their non-CPF money.

Yes, equities are volatile but it is the only asset class that can consistently generate higher returns. Investing over the long term can cushion the volatility.

What pot of money is more long term than the CPF? You cannot withdraw it until you are 55, and you can continue to manage your balance into your 80s. That means your investment horizon could be 50 years if you start in your 30s. Equities have beaten bonds, T-bills and fixed deposits over one, five, 10, 30 and 50-year periods.

Of course, the past is not representative of the future, but when have we ever known what the future holds? In the depths of the Covid-19 crisis, when stock markets fell 30 per cent, did we know equities would end 2020 in positive territory, and go on to generate some of the best returns over the next five years?

What about the 20 per cent correction in 2022 – did we know that the market would rebound over the next three years to repeatedly reach new historical highs? Did we know post-GFC (global financial crisis) that markets would generate the best returns over the next 17 years? As for current conditions, can you confidently say that markets are too expensive, too high or bound to decline?

In this column, we focus on empirical evidence. Instead of fearmongering, we focus on learning from history and the science behind investing and wealth management. It is important to remove all biases and assumptions, and always avoid the pitfall of trying to predict markets’ future direction.

Here is a fact: Over a 15-year rolling period, equities have never lost money. If you have an investment horizon of 15 years or more, you would do very well in almost all scenarios; even in the worst scenario, you would still make positive returns.

Let’s boil it down to probabilities to help you grasp the concepts. Over many decades, there is a 100 per cent chance that inflation will eat into your purchasing power. The likelihood of you growing your wealth significantly without taking risk is zero.

How much risk you take is completely up to you. But there is almost a certain chance of beating inflation if you invest in low-risk bonds when interest rates are high or falling, but there is the same chance that you would do worse when interest rates are low or rising.

If you invest in equities long enough, the risk of losing money falls to zero. The longer you invest, the higher the probability of achieving the long-term average returns of 7 to 10 per cent.

Can you afford not to invest your OA?

Your decision to invest is personal and based on your level of financial literacy; personal risk appetite; the size of your investable OA as a proportion of your total wealth; your age; and investment horizon. Some people have more than S$1 million in their CPFIS. That amount is likely achieved via investments and not via fixed deposits. The accompanying chart illustrates how outcomes diverge when a lump sum of S$20,000 from the OA and S$200 monthly are invested at varying return levels from 2 to 8 per cent a year.

The question to ask is not if you can afford to invest your CPF funds. Instead, the question should be can you afford not to invest your CPF money?

If you invest over a long horizon, you are unlikely to lose money over time. But if you do not invest, it is with 100 per cent certainty that your money will not grow. Investing is the only way to have any chance of securing your retirement and long-term financial future.

Samuel Rhee is co-founder and chairman and Hugh Chung is chief investment officer at Endowus, a digital wealth platform with over S$10 billion in client assets across public, private markets and pension (CPF and SRS).

Source: The Business Times; Why you should invest your CPF savings, 3 February 2025. © Singapore Press Holdings Limited. Permission required for reproduction.
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