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Why young people should NEVER invest their CPF savings?
By Gary Tay  •  August 18, 2011

In the course of conducting investment reviews for many of younger clients, I have observed that many of them have invested a large portion of their CPF monies and have suffered substantial losses due to the 2008 recession.  I will put forward several reasons why young people below the age of 30 should never invest their CPF monies. 
·         Large capital outlay ahead
·         Short time horizon for CPFIS – OA investments.
·         Risk free rate of 4% for CPF Special account is attractive
·         Risk adjusted returns for CPFIS investments is not a good deal
Large capital outlay ahead
The majority of young couples, would be looking for a build to order (BTO) flat in Singapore if they intend to marry young. In order to apply for a HDB concessionary loan, one has to ensure that all monies under the CPF ordinary account ...
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By Gary Tay
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9 Comments

9 responses to “Why young people should NEVER invest their CPF savings?”

  1. Derek Lim says:

    Hi Gary,

    Your views are valid but in my opinion “never” is too strong a word to use. I believe the problem is because the investor is not given the complete information. CPF isn’t meant for short term investing. You still can but like you mention, the risk is very high. Especially so if you intend to use it to buy a house. I have met several agents who only focus on investments using CPF without doing a proper fact finding on the individual long and short term needs, capability and risk appetite.

    I do have a small amount of my OA invested when I was in my 20s and I don’t intend to sell it to finance my housing loan. I just make sure that I proportion my CPF base on my comfort level. Another advantage is in the event I lose my job and still need to service my loan, I can sell that small amount of investment to tide me over for another few months. Of course the downside is I may have to sell it at a lose but the risk is minimized if you start early.

    It is only when you get older that finding a job become challenging. If you buy a sound investment at age 25 and get retrenched at 45, you have 20years for your product to grow.

  2. Jared Seah says:

    Eh… Whatever happened to the magic of compound interest if we start early?

    Going along the same logic, young single working people under 30 should not buy insurance products using CPF too… No dependants, insurance yields not higher than CPF rates, got company medical and dental benefits, etc.

    In my humble opinion, it’s not about age. It’s the build-up of financial literacy. And the sooner we start (making mistakes), the better (more time for recovery)!

    Cheers!

    • Gary Tay says:

      Hi Jared,

      Due to the low interest rate environment in Singapore, many investors are forced to to take on more risk in order to beat the annual 3-4% inflation rate. CPF is one of the few vehicles in Singapore where compounding interest can still work its magic.

      Many young people do not invest CPF monies on their own accord but on their advisers recommendations, and that is where i feel financial literacy can go a long way. I do agree sometimes mistakes have to be made before real learning takes place. Many of my younger clients have learnt the hard way too.

  3. Gary Tay says:

    Hi Derek,

    Do appreciate your comments… Yes you are right, using CPFIS-OA as an emergency fund buffer is a very useful strategy implemented by financially savvy individuals. If the investment time horizon is 20 years, it is also very likely that one will be able to outperform the CPF OA interest of 2.5%. I have brought up this topic as many young people i met expect to cash in their CPF investments about 5 years time, thus i was curious about what type of return expectations they are given by their financial adviser?

  4. Derek Lim says:

    As Jared mention, it is important to instill financial literacy into them. If you are expecting 20 to 30% in 5yrs, yes it is possible but not with your CPF money especially if you plans to buy a house. Unfortunately for those in their 20s they may not have much cash on hand and CPF offers the most probably way of making a quick buck. This I feel is something that is frequently exploited.

  5. La papillion says:

    Hi Gary,

    Going by the same logic, it seems like we shouldn’t use CPF to make payments for BTO as well. We should keep the money in the CPF because it is earning more interests and it’s riskfree!

    I think as long as you know what you are doing, you should go ahead and do it. I know people who are earning more than the rates given by CPF. Don’t even begin with buy and hold approach…holding stocks for the wrong term, I mean long term, is romantic at best. I hope you’re not advocating that holding long term means there will be less chance of losing money.

    Never say never! Oops, I just said that twice…

    • Gary Tay says:

      Hi papillion,

      You have brought up a relevant point. The opportunity cost of using CPF OA as downpayment for HDB is the 2.5% interest foregone, even so the CPF board will require us to repay the monies + accrued interest earned when we sell the HDB flat. Most young couples will wipe out all their CPF OA savings when they buy a flat as they do not have much cash on hand, so i see it as its a matter of no choice rather than choosing CASH or CPF.

      Obviously there also are successful investors who trade short term and make above average gains, but they form the minority… For the general public who might not have above average investment skills, a long time horizon does allow one to hold out for losses to rebound. I would consider a long time horizon as at least 10 years. (Savvy traders will completely disagree with me on this)

  6. Gary Tay says:

    Hi papillion, appreciate your comments…
    Anyway i am a fan of your blog, do keep up the great posts!

  7. Leave behind your CPF investible fund to earn 2.5% compound returns and only touch it after you have exhausted all your investible cash fund. It is just interests-wise sense.

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