In our previous article, we compared Gold to CPF. The results show that while gold provides a slightly higher return than CPF, the risk (price swing) associated with gold is also much higher. As such, gold should be invested only if investors can buy and keep for a very long time (think 10 years or more). This time, we will be comparing stocks to CPF returns. For stocks, we will be using our Singapore’s Straits Times Index (STI) as a basis for comparison.
Straits Times Index (STI)
Price in 2nd Jan 1988: $908.90
Price in 2nd Jan 2017: $3046.80
Annualised Rate of Return: 4.26% (excluding annual dividends paid by STI)
$100 invested in 1988 will grow to $335.22 by end of 2016
However, STI pays a dividend every year. It is safe to assume a 2% dividend rate every rate, which increase our annual returns to 6.26%.
CPF Special Account (SA)
Annualised Rate of Return: 3.99%*
$100 saved in 1988 will grow to $310.62 by end of 2016
*The CPF SA interest rate we have been receiving since 2000 is the guaranteed interest rate of 4% because global interest rates have been set low since the burst of the dot-com bubble.
Actual interest received from CPF will be higher than the above calculations as we did not include the new +1% interest applicable to the first $60,000 in our CPF accounts as it would make the calculations more complicated and inaccurate.
Does this mean I should invest in Stocks?
Investing always comes with risks, and as an investor, you must always be able to weigh if you can accept and live with the risk. Stocks are great tools to grow your money in the long-term. But in the short-term, the fluctuation in stock prices can make you experience huge mood swing and your financial stability. Therefore, the key to investing is always
1) can I stomach the risk of loss?
2) do I need the money in the next few years?
Growing your Money over the Long Term
In the long-term, Stocks can provide you with a return that is significantly above the interest rates CPF pays you. However, Stocks are subjected to huge price volatility – prices can rise 10% on day one and drop 10% on day two for no apparent reasons. Although it looks like stocks give you a much better deal (higher returns), it is still possible for you to lose money if you have a short-term horizon or am speculating.
As you can see from the chart below, when you invest in Stocks, it is possible for you to experience a big drop in value in any one year, just like in 2015 to 2016. Do you recall any financial crisis? I sure do not remember any and, yet stocks dropped 22% that year. But Stocks do provide great upswings also. It returned almost 60% from 2009 to 2010! So, it is not all down and no up. The key is to stay invested throughout the periods to achieve that long-term average returns.
As you can see, the price fluctuates wildly but trends upward always. The goal is to buy and hold it for as long as possible (think forever), allowing it to keep growing while we live our lives as normal citizens. That is one of the keys to good investing.
Short-Term Monetary Needs
A rule of thumb is to never invest your money if it is for emergency or for something important like your BTO down-payment or hospital bill. Like most of the TV shows, you watch where the main character goes broke, tries his/her luck in the casino and usually end up more broke. This will probably happen in real life too if you risk your money and treat the stock market like a casino.
Instead, you should keep the money you are going to use soon in a bank, be it a savings account or fixed deposit. Or you can consider the Singapore Savings Bond (SSB) which is quite flexible and provides a slightly higher return (that is another topic on its own we will leave it to next time).
The Middle Ground
CPF can provide you with predictable, stable and consistent returns that although you will find it hard to withdraw, it will not disappear overnight. The stock market, on the other hand, provides you with higher returns, the adrenaline rush and a more secure retirement, if you cannot manage it properly or correctly, you could end up with huge losses, sadness, and working way pass your retirement to make up for the losses.
Be prudent when it comes to managing your money. Go safe with CPF if you cannot stomach losses and the higher risks. Go high with Stocks if you want to have a better retirement and can stay invested over a long-term.