Using CPF for The Bedokian Portfolio? Part 2

In this part, I will describe on how to go about implementing your Bedokian Portfolio using your CPF Ordinary Account (OA). Take note that I am posting this from the perspective of an investor who is below 55 years old.

Ideal Amount to Start

It is recommended to start off the CPF Bedokian Portfolio in one shot, much like the one bought using your disposable income with the same reasonings.¹ The ideal quantum to start, after setting aside a buffer for your home mortgage payments and/or kids’ education fees, would be $36,500 ($36,500 – [35% x $36,500] – [10% x $36,500] = $20,075). The 35% and 10% are the stocks and gold limits, respectively. The remaining $20,075 is to fulfill the “no-investment” rule for the first $20K of your CPF OA.

Planning The Portfolio

The asset classes that make up The Bedokian Portfolio are available for investing using CPF OA, but we would have to tweak the allocation to suit the limitations imposed (i.e. 35% stocks and 10% gold). According to CPF, the 35% stock limit encompasses equities (including REITs) and corporate bonds, but not Singapore Government or its related bonds.²

We cannot use the balanced Bedokian Portfolio (35% equities and REITs, 20% bonds, and 5% commodities and cash) for the CPF OA based on this limitation, but we could make full use of the risk-free interest rates offered by CPF OA (currently 2.5%/3.5%) to our advantage. Cash is traditionally seen as the lowest yield bearing asset class in The Bedokian Portfolio, but with the relatively higher CPF OA interest, we can allocate a much higher portion to it in the CPF version.

The 35% Stocks Limit

The stocks part would preferably be filled up with equities and REITs that yield more than the 2.5% CPF OA interest rate. You may want to use ETFs, and for individual securities you could use the selection guidelines given in The Bedokian Portfolio³ or any other fundamental analysis methods to look for such equities/REITs.

Drilling down, I would allocate half of the 35%, i.e. 17.5% to equities and the other half to REITs, as I value the importance of diversification to manage risk. However, it is up to your preference on how this mix will be.

The 10% Gold Limit

For the gold component, there are only a few choices, with the SPDR Gold ETF listed on the Singapore Exchange (SGX) being one of them. For other gold products such as physical gold and gold savings account, so far only United Overseas Bank (UOB) offer such products, therefore your CPF Investment Account must be opened with UOB if you wish to invest in them using CPF OA.

Yield of the Portfolio

To recap from my previous blog post, the main aim of using CPF OA to invest is to achieve higher returns than the 2.5% interest rate offered, so that this amount could be used for other investments and/or payment for your kids’ education fees. Since the 2.5% interest rate (and the 3.5% interest rate for the first $20K) are considered risk-free, and gold does not give any yield, the equities and REITs yield would have to be higher than the CPF OA interest rate and to compensate for the no-yield of gold.

Using the average annual yield between 2006 and 2013 as highlighted in The Bedokian Portfolio⁴, equities is at 3.23% while REITs is at 6.39%. Putting them at 50-50, the average would be (3.23% + 6.39%)/2 = 4.81%. However, since this number has to compensate for the loss of yield from the gold component, we would have to discount it away by around 28.6% (10%/35%), hence the whole yield generated from the invested amount is at (100%-28.6%) x 4.81% = 3.43%, which is higher than the CPF OA’s 2.5%.

If you are not comfortable with this yield, rather than using the full 10% gold limit, you could just lower it to 5% instead, with the remaining 5% earning the 2.5% CPF OA rate. In this way the compensate for the yield bearing investments would be lower at 5%/35% = 14.3%, and the discounted yield is at (100%-14.3%) x 4.81% = 4.12%.

If along the way there are capital gains, then it would be a bonus as this would add on to the total overall returns of the investments.

Rebalancing

As CPF contributions are mandatory, there will always be inflows to the cash portion of the portfolio, and likewise the stocks and gold limits would rise along with it. Periodic rebalancing can be done, much like a typical passive Bedokian Portfolio, with the addition of positions to the two limits.

1 – The Bedokian Portfolio p73

2 – Central Provident Fund Board. Instruments that can be invested under CPFIS. Dec 2016 https://www.cpf.gov.sg/Assets/members/Documents/INV_InstrumentsunderCPFIS.pdf (accessed 19 Aug 2017)

3 – The Bedokian Portfolio p93-101

4 – ibid p70

Further references

Investment Products Included Under CPF Investment Scheme. https://www.cpf.gov.sg/Assets/members/Documents/CPFISInvestmentProducts.pdf (accessed 8 Sep 2017)