CPF Outperforms Market Indexes In 2015 – 3 Investing Lessons We Can Learn From This

A few days ago, CNBC wrote an article about how the humble CPF Savings Accounts managed to beat the returns of most markets in 2015.  The article did not go into details of exactly how many markets CPF beat, but a fair assumption would be that the majority of market indexes would have fared poorly in 2015 in contrast to the returns provided by CPF.

Here are some important investing lessons we can learn.

1. Minimise Transaction Costs

Many people do not appreciate the fact that returns provided by CPF are not only risk-free but also free from any form of transaction costs.

Transaction cost is an important component when it comes investing. It comes in different forms such as brokerage fees, clearing fees and management fees.  A high transaction cost can potentially eat into a large part of your returns over the long run if not kept in check. In this instance, CPF returns stand out from various other investing instruments because CPF members do not incur any transaction cost when they put their money into their CPF account to earn returns.

Unit Trusts Vs ETFs Vs CPF

Let us do a quick comparison between 3 types of commonly used investing instruments. Unit Trusts, ETFs and CPF. For simplicity sake, we will assume all 3 instruments provide a return of 4% per annum, and that an investment of $1,000 is made each month.

Assuming the same returns for the various instruments, common sense would tell us that the instrument with the lowest transaction cost would provide the highest returns to its investors. This will be CPF.

However, one can argue that it would be logical for an investor who puts his money into Unit Trusts or ETFs to expect a higher return. This brings us to our second point.

2. Higher Expected Returns = Higher Risks Taken

The first thing taught in Finance101 is that a higher expected return will always translate into higher risk taken. Like it or not, potentially high returns instruments such as stocks, properties and unit trusts would always carry a higher degree of risk compared to safer instruments such as fixed deposits and CPF monies.

In 2015, the STI index dropped by almost 15%. The private residential market also continued slipping downwards. The negative returns from these two types of investments illustrate the volatility nature of such instruments. This is in contrast to the stable, risk-free returns provided by CPF.

It is also important to remember that an investment that produces a negative return in one year would need to earn a higher return in the following year to return back to its original position. For example, an investment that loses 10% of it value in its first year will need a return of 11% in the following year to break even.

3. Investing Your CPF Monies Comes With An Opportunity Cost

CPF provides the option for its members to invest the money in their CPF account. Yet at the same time, the majority of these members would be better off simply leaving the money in their account untouched and to earn the risk-free rate.

The most recent data provided by CPF showed that only 15% of people who invest their CPF money managed to beat the returns provided by CPF. That’s a horrible statistics, especially when you consider the fact that these people incur a transaction cost (for example, brokerage firm charge you an extra fee for holding stocks bought using CPF money) and time to make these investments.

Investors who managed to earn higher returns should not be too happy either. Simply beating the risk-free rates offered by CPF is not cause for immediate joy without taking into consideration the extra risks taken by the investor.

We wrote in a previous article that investing your CPF money is likely to be a bad idea for most people. If you want to read up more on our reasons, we encourage you to click on the link.

Don’t Follow The Herd Blindly

We want to end off by stressing that the reason why we are writing this article is not meant to convince anyone to take out their entire stock portfolio and to put the money into their CPF account.

Rather, our aim is to remind readers that different factors such as transaction costs, risk tolerance and opportunity costs should also be considered.

And if you find yourself struggling to grasp any of these concepts that we have brought up, then there is a good chance that you would be much better off simply leaving your CPF money at where it currently is.

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