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Close To Half Of CPF Investors Suffered Losses

>> Tuesday, May 29, 2012

According to reports, 45% of CPF members who made investments through the CPF Investment Scheme (CPFIS) suffered losses during the period from 1 Oct 2010 to 30 Sep 2011. I am wondering if this has taken into consideration the opportunity cost of the risk free rate the CPF would have enjoyed had it not been invested, i.e. is the returns higher than the 2.5% for CPF-OA funds, 4% for CPF-SA funds and the additional 1% on the first $60,000. My belief is that it has not accounted for this or else, the percentage of members with the new definition of losses will probably be closer to the upper quartile.

In a written reply to parliament, Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam said the investment performance could have been adversely influenced by the volatility and overall decline of equity markets during this period. The risks lie in the performance of the funds or investment instruments that they choose, or in the broader investment climate. The timing of CPF members' transactions can accentuate this risk.

To summarize, high returns is coupled with high risk and market performance measurement depends on the selected time frame. I believe 99% of the population who invests understands this fact (or at least I hope).

I hope that this is just the simple response and much more is being done behind the scenes to delve deeper to the underlying reasons that is the cause of this.

Part One, "The risks lie in the performance of the funds or investment instruments that they choose". If looked at closer, the choices are limited as they have already been pre-filtered by CPF appointed consultant. What if the filter is restricting choices to the funds that will underperform? Thanks but no thanks. Looking at how the funds are accessed, their criteria include having a proven track record. Aren't we often warned that past performance is not an indication of future performance? Seems to be quite contradictory as markets move in cycles and yesterday's winners usually become tomorrow's losers. So, if the responsibility is to be pushed to investor's choice, please ensure it is a 100% full range choice, not a pre-selected list of potential losers.

Part Two, "The timing of CPF members' transactions can accentuate this risk". I suppose this cannot be helped as no one has the crystal ball to time the market perfectly. However, an area of constant concern is the churning of CPF funds to "withdraw" as cash. During bad times, desperate people might resort to such means to tide them over that period. However, it is during these bad times that churning would hurt them the most when markets are tanking.

In my opinion, this issue can be easily resolved. Focus back on the fundamentals of the objective of CPF and CPFIS. If cost of advice/transaction is required, make it an additional premium to be paid for in cash, it should not be eroded from the CPF funds. CPF funds should be treated like a sacred cow and should not be used to pay for additional cost arising from the investment like cost of advice, transaction, maintenance. Sunk internal investment cost to the instrument itself like fund manager fees, trustee fees, etc, of course remains within the instrument and that is fine. It is the external additional cost that should not be paid for using CPF invested funds.

For the rest of the majority, myself included, do not invest. It is most likely due to using the funds for our residential property, so much of which that is said here does not even concern us. :)

2 comments:

Temperament May 29, 2012 at 4:30 PM  

Yes! one must think twice before foregoing at least 2.5% of interest to invest in the stock market. Another words, you lose minimum 2.5% of your money right away.

Lau May 30, 2012 at 8:23 AM  

Hi Temperament
Actually 2.5% is not a very high hurdle. But CPF SA 4% and the extra 1% risk free is definitely not an easy hurdle.

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