CPFIS not "fit for purpose" - DPM Tharman

CPF Investment Scheme to be reviewed

I refer to this article by the Straits Times: here. There are three main takeaways after I read the news article.

Takeaway 1: Most people would do better just leaving their money in the CPF OA

He noted that, over the past 10 years, more than 80 per cent of members who invested via the CPFIS would have been better off leaving their money in the Ordinary Account, which earns a guaranteed 2.5 per cent each year. About 45 per cent of those using the CPFIS even made losses over the same period.

To me, it feels rather sad that the general public is still not very financially educated. A 2.5% rate of return is not difficult to surpass at all, but over 80% of the members fail to surpass it. The solution is simple, simply invest into an index, and you will do better than at least 80% of the people out there.

Takeaway 2: Members have to pay fees to investment managers, eroding their returns

"We have got to enable people starting from a younger age to take some controlled risk using their CPF money in order to earn higher expected returns... than what the CPF account would offer. The traditional way we try to provide it is through the CPFIS system. It hasn't worked out," he said.

One reason for this is that members investing via the CPFIS have to pay fees to investment managers, which then erode their returns.

Very simply, the more fees you pay, the less you get to keep. Even if the investment returns do not perform, fees are still paid, and money taken away from you. Fees erode returns. Go for a low-cost investment.

Takeaway 3: Human emotions of greed and fear affect our returns

Another reason, Mr Tharman said, is that the average investor can undermine his own interest, buying when the market is euphoric and selling when prices are down.

Mr Market is playing with the investors, and many investors are being played by their own emotions. When the stock market rises, we buy more, hoping it will rise further. When the stock market falls, we sell quickly, afraid that it will continue falling. This leads us to buying at peaks, and selling at troughs, making losses instead of profits.

The simple solution? Dollar cost averaging. Buy into a diversified pool of assets regularly, and do not time the market. Of course, you can only dollar cost average into an asset that will only rise in the long-run.

Further readings:
What equities do I invest in?
How should you invest?
Everyone investor should read this
30 stocks is NOT all you need for diversification
Forget dollar cost averaging. This is value averaging

In summary

Most CPFIS members do not earn more than the guaranteed 2.5%. It may be due to management fees eating into returns, or the human emotions of greed and fear working against us, or both. The solution is simple: regularly buy into a diversified pool of assets, and rebalance your portfolio annually.