Why should we ever use our CPF OA for investment?

Whenever I bring up the topic of investing the money in my CPF Ordinary Account (OA), my dad will always remind me that the primary purpose of our CPF is to support our retirement purposes; and I should consider very carefully if I decide to use them to invest in stocks/bonds/gold. Well, he is not wrong and there is little reason to disagree with him. The present CPF OA’s 2.5% interest rate is actually not too bad and most importantly, it is risk-free. So why should we ever use our CPF OA for investment?

Our triggering point came last year when it dawned on my wife and I that all of our CPF OA will soon be wiped out by HDB. We started to ask ourselves whether this move will fit well into our investment strategy. A few questions sprung to our mind:

· What is the purpose of the money in our CPF OA? I think this is the most fundamental question that we should ask ourselves. If we are not convinced, we would just let HDB flush away our CPF OA as clearing our loans should be the safest bet, right? Well, one potential use-case is for the purchase of a 2nd property in future. The money in CPF OA would be useful in providing extra firepower to our “cash-on-hand” to fund the purchase.

· What are my options to prevent our CPF OA from being flushed out? Based on my research, they include: (Option 1) Transferring the money from CPF OA to CPF Special Account (SA). (Option 2) Use the CPF OA money to invest in stocks, bonds, gold and/or etfs.

· What are the pros/cons of Option 1? The SA account yields a higher, risk-free 4% interest rate return. This interest rate is much higher than the 2.6% HDB loan rate which means that I could earn an additional “1.4%” and more each year. However, in the near term, I might have to use some “cash-on-hand” each month to cover the loan if my monthly OA contribution is unable to. Another consideration is that this money could only be withdrawn around 20 years later.

· What are the pros/cons of Option 2? This option will allow us to hold our money in CPF OA so that when the opportunity arises, we can use it for our future purposes. The downside is that there is a potential likelihood for the OA money to get stuck in a paper-loss situation. We will also have to take on the investment risk fully by ourselves instead. 

So what is our final decision after all these brainstorming?

We decided to adopt a hybrid approach using Option 1 and 2. The current interest rate for HDB Loan is 2.6% and I believe that it is not too difficult to achieve an investment return that is higher than that. My aim is to at least achieve a minimum of 3% returns per year in order to be higher than the 2.6% loan rate after deducting all transaction cost. I focused our portfolio on 2 strong companies - Singtel and OCBC so that even if we get ourselves into a paper-loss situation, their annual dividends should still be stable enough to maintain throughout. 

Over the past weeks ago, my wife and I have purchased and are adding more Singtel, OCBC which we think are suitable at this point; and also STI ETF shares into our CPF portfolio. Once we have used up our CPF OA until its remaining S$20K, we are likely to transfer a portion of the S$20K into SA; after taking into consideration all other payments such as the remaining 5% downpayment (staggered downpayment scheme).

Moving forward, we are keeping a close watch on the HDB loan rates. This is important as any drastic increase could potentially change our approach, though we believe that the chances of this happening should be relatively low. Still, no one can ever predict the future and we should just get ourselves prepared.

Hope you enjoyed this sharing and so, What will your approach be if you are in a similar situation ?

Together, let us all Go & Huat ah!

GoHuat

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As the Day of Reckoning Nears

My choice article that sums up succinctly what has happened recently is this. (It’s because I really like the two GIFs at the beginning how it clearly shows how every corner of the market has moved.) While a few days of data don’t usually make a longer term trend, what I do (and only) know is that we can’t afford to be complacent.

In the Asia high yield bond space, after a few days of a slow grind downwards, the market today opened very weak, with one shop describing it as “panic bid hitting on screen”. (Hitting the bid means selling.) Commodity names and bonds with long maturities were hit the most, which means it must be because of (1) oil prices (domestic inventories data) (2) rates (ADP job reports).

I must admit I was surprised by the rates movement. Isn’t it priced in already? Fed Chairwoman Janet Yellen’s statement last Friday “As I noted on previous occasions, waiting too long to remove accommodation would be unwise” is particularly notable, because besides being as explicit as she can be, it represents a sudden U-turn from the previous dithering the Fed has displayed for the last few years about raising rates. This U-turn is summed up by a global strategist: “We all know that the only data the Fed is really focused on is the daily S&P print.” Lol.

On commodities, rather than oil, perhaps we should take a look at copper, a well-known bellwether for the strength of economic growth given its pervasiveness in everyday hustle and bustle.

Source: Soc Gen

The chart clearly shows that while the correlation between copper prices and stock prices has been inverse since 2011, stock prices rose further even as copper broke out of the downtrend. Pre-2011 aside, what it suggests is that investors have flipped from seeing the deflationary backdrop of falling commodity prices and bond yields as good for equities, to rising bond yields and commodity prices also being good for equities. Which brings me back to the theory that people are just looking for whatever reasons to buy. Surely that is not sustainable? Of course this is just what I think, which doesn’t matter. It’s all about the market (a collective opinion of the masses) and the expression of its opinion, and obviously it’s bullish.  

In any case, what is the implication for us?

Short term downside risk is increasing due to more hawkish Fed rhetoric at a time when investor positioning is stretched. A correction will then provide a more comfortable buffer for us to enter our bets on the improving economic and corporate fundamentals and potential pro-growth policy reforms.

Again, my opinion.

For now, I will just read my newly acquired book “A Guide to the Good Life” by William Irvine.

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The case for cash + Some thoughts on Warren Buffett's letter

As many of you know by now, the DJIA topped 21,000 for the first time ever with Trump’s latest speech to the Congress resonating strongly with the market. The speech offered slogans, few detail, yet the market keeps charging ahead. Strange world, isn’t it? Naysayers have stayed on the sidelines waiting for a correction to come, yet they are getting left behind in the dust.

Source: Google images

There’s a theory going around that there’s just too much cash lying around waiting to be deployed, so people are just looking for reasons to buy. True or not, such mentality effectively pushes investors towards owning assets at virtually any price, which is surely nonsensical. 

What’s wrong with cash anyway? True, it generally has a zero expected real return. But at least there is a near certainty around that expected return, which sometimes is more attractive than the highly uncertain expected real returns on offer when alternatives are overvalued. It is beginning to feel like one of those times.

There are some pointers that I wish to share from Warren Buffett’s latest shareholder letter, which I finished reading a couple of days ago. There are many valid points that he made, but let's take a look at the top three for me:

(Admittedly, this is the first of his shareholder letters that I’ve read in detail. As I look to improve my knowledge as an investor, I plan to read all of the rest soon because it is truly as insightful as it has been said to be.)

1. “Of course, a business with terrific economics can be a bad investment if it is bought at too high a price.”

Reiterates what I just mentioned above. I know there is a lot of literature on this. Everyone wants to buy low and sell high, but it’s easier said than done. I’ve had my fair share of pitfalls too. Two things that I learnt I should have: (1) Discipline - stop that itchy finger! (2) Cash. Lots of it. Cash has one important endowment which is too frequently unrecognised: a hidden optionality derived from its relative stability. In other words, the holder of cash has an effective option to purchase more volatile assets if and when they become cheap. 

Speaking of cash, OCBC 360 is facing new changes (again) effective 1 April. Seems like the bank wants to further increase the deposit base and shift more into the revenue-generating products. Read Ezhuat's post about it here.

2. “Too many managements – and the number seems to grow every year – are looking for any means to report, and indeed feature, “adjusted earnings” that are higher than their company’s GAAP earnings.”

Eeeks, I really do hate it when I see the word “adjusted”. Because then I have to find out what has been adjusted, why they were adjusted, and more often than not there is not enough information (especially for private companies). Coincidentally, I had been reading through the prospectus of an F&B company earlier in the week and was quite disturbed (more like irritated) when I realised that the section on financials is littered with the word “adjusted”.

Look at this:

Whut? Had a headache immediately.

“Two of their favorites are the omission of “restructuring costs” and “stock-based compensation” as expenses.”

Hear, hear! Look at these adjustments to EBITDA of the same company:

Ok to be fair, the company had just made an acquisition, hence the acquisition costs and restructuring and integration costs etc. BUT that’s precisely the company’s entire business strategy. For growth, it acquires underperforming units from its competitors and refurbishes, converts, and integrates them into its own brands. They have such costs constantly, every single year, so obviously earnings should fully reflect them. The same goes for every acquisitive company, including Berkshire:

“Berkshire, I would say, has been restructuring from the first day we took over in 1965. Owning only a northern textile business then gave us no other choice. And today a fair amount of restructuring occurs every year at Berkshire... We have never, however, singled out restructuring charges and told you to ignore them in estimating our normal earning power. If there were to be some truly major expenses in a single year, I would, of course, mention it in my commentary... But, to tell owners year after year, “Don’t count this,” when management is simply making business adjustments that are necessary, is misleading. And too many analysts and journalists fall for this baloney."

3. “At Berkshire, we never count on synergies when we acquire companies.”

This comment appears to be made in passing as Warren Buffett talked about one of his favourite businesses. It struck a chord with me, because I have a case in point regarding promised synergies.

There is this food retail company in some part of the world which, a few years ago, acquired a food retail company in a neighbouring country, touting massive synergies from cost rationalisations and whatnots. Investors lapped it up, provided generous financing, and patiently waited for the magic to happen. Fast forward to now, the touted synergies still have not been realised, business is deteriorating at the acquired company because of intense competition, the acquirer is spending more than ever on the acquired in order to compete, debt load is massive with upcoming maturities, and worst of all the management has problematic communication which leaves investors second-guessing.

The market, of course, has gotten impatient and the company is now being punished. Bond prices came down probably about 30 points or so within a month.

Would love to write more, perhaps on how Warren Buffett humbly admits his misjudgments, how he gives his stamp of approval for low cost index funds, or how there seem to be subtle allusions to Trump (maybe I read too much into it), but I shall leave you with this:

“Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.” 

Good luck in the markets!

Cheers

Yolohuat

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Will you continue to be loyal to the revised OCBC 360 Account?

When I was in the midst of work today, I received an SMS from OCBC informing that there will be changes to the OCBC 360 Account effective on 1 April 2017. I took a quick glance and was kind of disappointed with the so-called 'enhancements'.

In one of my posts, I blogged about the OCBC360 on What’s Next After Savings? This was the account which helped to kickstart my investment journey. With the upcoming revised changes to the interest rates, is it still worthy to put your funds in this account? Let’s delve deeper.

With effect from 1 April 2017, OCBC will be making five changes to the OCBC 360 Account.

Table 1: Comparison on upcoming change to OCBC 360 Account w.e.f. 1 April 2017
	Current	New
Balance cap to earn bonus interest under OCBC 360 Account	$60,000	$70,000
Salary bonus - Credit a minimum monthly salary of S$2,000 through GIRO	1.2%	No change
Payment bonus - Pay at least 3 unique bills with your OCBC 360 Account	0.5%	0.3% (To qualify, pay at least 3 bills totalling at least S$150)
Spend bonus - Spend a minimum of S$500 across your OCBC Credit Card(s)	0.5%	0.3%
Save bonus	Earn 1% per year on your incremental balance	Earn 1% per year on the first S$70,000 if account balance is ≥S$200,000
Wealth bonus	1%	Up to 1.2%
Base interest	0.05%	0.05%

With the above changes, how will it impact my current funds sitting in the account?

In my situation, all the changes will impact me except Weath Bonus as it is not applicable to me because I did not purchase their insurance product.

Let’s do a comparison assuming I have S$70,000 sitting in OCBC 360 Account under the revised scheme and fulfilled the salary, payment, spend and save bonuses.

Table 2: Comparison of Interest Earned
	NEW	CURRENT
	Interest Earned p.a. for $70,000	Interest Earned p.a. for $60,000
1.2% Salary Bonus	$840	$720
0.5% Payment Bonus		$300
0.3% Payment Bonus (revised)	$210
0.5% Spend Bonus		$300
0.3% Spend Bonus (revised)	$210
1% Save Bonus (revised)	N.A.	Assuming there is no increment
0.05% Base Interest	$35	$30
TOTAL (indicative)	$1,295	$1,350

In the table above, it is clear that I will earn $55 less under the revised changes. Moreover, I would have earned more interest under the existing Save Bonus if there are any incremental balances from the previous month’s balance contributed by my monthly salary which I did not reflect in the table.

For the Payment Bonus, you need to ensure your 3 bills total up to at least $150. There is no cap currently. However, I believe this should be easily achieved for most working adults.

If I continue to keep my funds in the revised OCBC 360 Account in Table 2, I will only get to earn 1.85% interest per year, down from 2.25% currently. On the other hand, I am sure there are many other better fixed deposit accounts which you can earn more than 1% with $200,000 rather than park it under OCBC 360 Account for 1% on the first $70,000. That means the balance $130,000 will be idling in the account and only accrue a miserable 0.05% base interest.

While OCBC calls it an ‘enhancement’, I seem to interpret that they telling us that the good O’ days of OCBC 360 Account is going to be over soon :(

Maybe it’s time to search for other better savings account now.

Will you continue to pledge your loyalty to OCBC 360 Account? Feel free to share your views as different people have different savings strategies :)

Cheers, EzHuat

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