Event: Stashaway Academy - Market Outlook 2019

A Wednesday evening talk at the newly-completed Frasers Tower on Cecil Street.

As I approached the ground floor lobby, the public announcement system played a pre-recorded message that the cause for a fire alarm (presumably triggered just a few moments before) was being investigated. For office workers at the end of their workday, there was no cause for panic, and an intermittent trickle exited the building, headed in various directions, no different from a typical workday routine.

Alas, a long line had formed at the security counter, with more than 20 people waiting to obtain a visitor pass. My guess was that most people were here for the same event. I joined the line. Progress was excruciatingly slow, but I still had full intention of attending this talk which I signed up for a while ago. My patience was worn gradually as ten minutes of waiting in line only yielded a few metres of forward movement in the human queue. One of the event organisers apologetically appealed to the participants for their patience, and his frustration was palpable from his comment to the effect that this was likely the first and last time they would use this space for any of their events.

Finally, there was some executive intervention - presumably some negotiations with building security that playing it by the book wasn't working out very well, and that something had to be done to remedy the unacceptable situation. We were allowed to enter the barrier gates leading to the lift landing area, where batches of us were then ushered into commodious high-ceiling elevators bound for The Executive Centre, a mixed-use space on the 17th floor of the building.

At risk of sounding slightly quixotic, it was perhaps an apt metaphor of an investment paradigm that would be pointedly relevant to the subsequent talk -- the fire alarm representing the constant barrage of media claiming to foretell the impending arrival of the next big recession and absolute financial apocalypse; the slow exodus of tired office workers being those who experience the misfortune and jadedness associated with selling low after buying high, figuratively coming back down to the ground (and literally as well, from their lofty offices high above).

The metaphor flows easily into the time spent waiting in line for security -- this represents the patience demanded of all who seek to be contrarian investors, the minority group who look to enter the building (investment opportunities) when everyone is being told by the fire alarm (the media) to leave. And when the time was right, the gates opened, the bulls came charging in (you got that), and all of us went up, up and up ... to level 17, where we were rewarded for our patience and willingness to stick to earlier convictions with a good sharing session in how to look at 2019 by Stashaway.

It serves little purpose for me to regurgitate what Freddy Lim, Stashway's co-founder and Chief Investment Officer, had to say, given that I've already painted the picture of the paradigm with the preceding paragraphs (double score for alliteration), but I'll leave you with three quick thoughts:

Unlike what you might be led to believe if you follow the media closely, we're not in a recession. Not yet, at least. I'm intending to follow the Conference Board's Leading Economic Index closely through 2019, and for the latest update the trend points towards continued positive growth, albeit much-curtailed from the earlier half of 2018 as well as much of 2017. Key takeaway: (my own, and not something mentioned by Freddy) Reading news to get an idea of what is going on is NOT the right way to do it; instead, read news with a strict goal of formulating your own opinion of what is taking place.

Understand your risk and your needs. This is super difficult to determine, since each of us have individual goals and financial situations. It's tedious, bothersome, and often under-appreciated (somewhat like going for a regular health check-up), but it's something all of us should do on a regular basis. Unlike a health check-up, it's difficult to find resources (people as well as information) to help you formulate an assessment of your risk and needs. Too many purported financial advisories are marketing and sales people in disguise, and good-quality financial advice is often not available or practical to those of us who don't have multi-million dollar portfolios to manage. My advice: read widely, start practicing (you could set up a paper trading account if you feel that helps you understand how investment things work in general), and draw lessons. Being clear of your goals will help you be cognizant of your risk appetite, and should guide your investment decisions.

The future is, ultimately, unpredictable. This was a point that Freddy brought across - that this evening's session was not about forecasting or predictions. Instead, he guided the audience towards a way of thinking, which I feel is quite difficult to hone in an age where there is constant media attention on just about everything. Freddy did have one slide showing the federal funds rate curve, from today out to around late 2021 (if I recall correctly). While the slide was used to illustrate a different point, it did strike me that we have nary a clue if the federal funds rate in 2021 was really going to be anywhere close to projection A or B or C or D. Heck, as at 9 January 2019, we hardly know how many rate hikes there are going to be in 2019 itself - the last we heard was probably two hikes, and then now we hear that there may be scope for a pause (or not?) Even in late 2018, there was uncertainty over whether there would/wouldn't be a final hike for the year. Come 2021, will it still be Jerome Powell as Fed Chair, Donald Trump as US President? Okay, we can be sure of one thing: President Xi in China, but other than that, really everything is anyone's guess, and everyone can guess can anything.

So it's much more useful to spend one's finite mental energies developing a way of thinking, than developing fine-grained predictions. When I picture that federal funds rate curve, the only part of the curve that really matters to me is the next 12 months or so. Beginning from the second half of this subset (i.e. around 6 months out), the line widens out into a triangular-shaped area, representing a cone of possibilities. The future is likely to lie somewhere within this cone, but as we go further (two or three years from now), that cone funnels out wider and wider, covering an increasingly larger vertical span of the entire graph, such that by the end of three years, the cone is so wide that it's practically useless for any kind of point-precision projections (which is precisely the point - oh, some word play there), but it's intuitively useful to illustrate the instructive uncertainty surrounding any kind of longer time horizon projection.

And I'll leave you with these thoughts for now, cheers and out!

Right to the end

You know how they say, the game ain't over till the fat lady sings?

The previous post on 20 December 2018 could be a good example of that.

Portfolio sank into the red (!) almost right after the post, and was almost 6% down for the year, until a brief recovery in the last moments - literally between Christmas and New Year's Eve, pushed it back up into the green.

Whew!

Back where it begun

As 2018 wraps, it's time to take a look back on the year.

The chart says it all - I'm back to where I started the year. Q4 was basically a quarter of trauma, and I'm fortunate to have kept north of the S&P500, albeit slightly, in terms of my USD-denominated investments.

A couple of lessons -

Don't be greedy. Yeah, we all know that - in theory. I watched in glee as RLH climbed up far beyond my expectations, and before I knew it, it was back down at what could be considered fair/slightly discounted valuations. I am looking at a big patch of red.

Some things might not make sense - for the time being. Back on 21 May, I published a post about MU (Looking for value - case study on Micron). Guess what? That post was just about a week shy of MU's peak at $64.66. While I am lucky not to have entered at the peak, MU is now also another position that's deeply in the red. The recent weak forward guidance has not helped the cause, and makes me wonder whether the market knew beforehand that there would be weakness in NAND/DRAM demand and progressively began to price it in. As of today, the stock trades at a ridiculous TTM P/E of less than 3, but it's the future that's going to bring returns, not the past. I still like MU because of its strong cash position and the in-progress $10b buyback, but the forward guidance cannot be ignored. The company is not trimming $1.25b in capex frivolously, and must foresee market challenges ahead to be doing so. I believe there is long-term upside, but this will require patience and in the meantime I'll look for opportunities to bring down my cost basis.

Options aren't easy. I don't think I made positive returns on a single option trade this year, but this is a completely new beast for me. Options have their usefulness - buying $34 MU puts just before the earnings release would have cushioned the blow a fair bit, but I don't have enough experience to use them to my advantage yet.

With the recent volatility, it is tempting to exit one's positions and sit out the next couple of months (especially considering the Jan 2019 SSB issue will get you around 2% p.a. for the first year), but that may be an overreaction. While 2018 will fall shy of my desired returns, I take consolation in having stayed ahead of the S&P500, and will bring the lessons above into 2019.

In the meantime, I'm trying to keep a pulse on the M&A prospects, having narrowly missed on Panera Bread in 2017 and then Sodastream in 2018. Having not been able to plan a trip to the US this year (the first calendar year I've not stepped on US soil since I started university as a freshman!), my ability to get a pulse on things is severely diminished, so this is a lot more difficult than I would prefer.

On the home front, I continue to stare at lacklustre portfolio performance across all SGD-denominated holdings (seriously, I would be better off if I had put my money in SSBs) but will be focusing on finding good entry points for selected REITs in 2019. I've hitherto tried to apply my US stock thesis onto SGX stocks, to little success. In 2019, I'll shift towards a more dividend-driven approach for SGD-denominated holdings and hopefully be able to pare down on some of the big drags on my portfolio - I'm looking at you, S59.SI.

Till the next time, cheers and out.

At the one year mark with IB

I set up my account with Interactive Brokers just about one year ago. Prior to that I was using Standard Chartered as my primary online broker, followed by TDAmeritrade. So far, I have found IB most suitable for my needs.

One of the strong points of IB is the ability to generate all kinds of reports. This really helps me review what I have done, and allows me to refine or reconsider my investment and trading strategies going forward.

If you already do some form of investment (or trading), it is good to ask yourself how you are tracking your past transactions, and their respective returns. It is easy to feel good about a stock that has doubled in price after, say, 15 years, but does it occur to you that such a stock was only growing by around 4.7% per year? Assuming that dividends were negligible, was the risk sufficient to justify the incremental 0.7% p.a. yield over, say, the CPF SA account that gives around 4% per year?

Unfortunately as a Singapore resident, I cannot trade Singapore-listed stocks through IB. So I still have to rely on Standard Chartered. For tracking purposes, I found a resource called Stock Portfolio Tracker created by Kyith of Investment Moats to help track stock transactions over time. It is a very detailed spreadsheet (perhaps with more features/fields than most people might want), but it is a good starting base.

I do hope that eventually, Singapore-based online brokers will realise the big missing gap and plug it by offering similar levels of client-facing features as what IB does today. But don't hold your breath...

So how are things looking for the period August 2017 to August 2018? Pretty good. Despite lingering uncertainty in markets that began around February 2018 and continue with the varied frequency of chest-thumping by big trading nations (mainly US and China) on tariffs and all, the S&P 500 Index (blue line) is close to all-time highs, and is up roughly 15% from this time last year.

While 2017 was an extremely forgiving investment environment (you could almost make money anywhere, just a matter of how much/little), 2018 proved to be far more tumultuous, with hair-raising drops in February and April. Nonetheless, I managed to eke out around 30% returns over the one-year period (green line), beating my personal performance benchmark of 20% p.a.

There has been talk of how we are almost certainly due for a correction. No one can say when for sure, but read widely to get a pulse of the macroeconomic situation around the globe. There will definitely be an opportunity to buy in to the market at discounted valuations when (not if) the correction happens, but that could be one or two or more years from now. In the meantime, consider the opportunity costs of holding excessive cash, which often ends up as the 'default' option for most of us, but is seldom ideal in terms of efficient employment of capital.

Investment-Linked Policies (ILP)

I profess not to have much knowledge in the field of insurance, but I recently dusted off some old files and looked at one of the ILPs that was sold to me when I was barely out of secondary school.

In a nutshell:

• You should stay away from these things unless you have an exceptionally clear idea of what you are getting yourself into and why.
• If you are looking for insurance policies, you are very likely to get more cost-effective insurance through term policies (where you pay a small sum every month for coverage).
• If you are looking for investment products, you should probably look elsewhere for something that is more transparent and incurs less fees (e.g. buying index ETFs).

I am in my 13th policy year, and I recently generated a revised Benefit Illustration (BI) for my policy.

In case you are not familiar, let me briefly explain the columns:

• Basic Premiums Paid: The cumulative amount that the policyholder (me) has paid into the policy. For this policy, I am required to pay every month for 21 years. 
• Gross Death Benefit: This is the insurance component of the policy. If the policyholder were to die at age 30, the insurance payout will be somewhere between the range of $39,639 and $45,260. The guaranteed and non-guaranteed portions are pretty much what their names imply. 
• Gross Surrender Value: This is the investment component of the policy. If the policyholder were to surrender (i.e. terminate) the policy at age 30, he would receive in cash somewhere between $19,899 and $20,566. Again, guaranteed and non-guaranteed mean what they say.

You will notice that both the non-guaranteed columns increase substantially over time. This simply reflects greater uncertainty over time. I believe the non-guaranteed columns are typically built on the assumption that the company (the policy provider) is able to generate 5.25% p.a. return on its Fund. If the actual return is lower than this, then you can expect that less than the full non-guaranteed amount will accrue into the guaranteed amount for that year.

I did a quick IRR calculation for two broad scenarios:

1) Immediate surrender of the policy at end of Policy Year 13

I can expect to get around $20,000 upon immediate surrender. Based on this, my "investment" would have yielded -3.1% per year. Yes, negative yield. This is not surprising since the cumulative amount I paid is around $23,500, but I am only getting $20,000 back, after 13 years as a policyholder. Ouch.

2) Holding to maturity, i.e. Policy Year 21

For this scenario, the guaranteed surrender value is $31,239 while the non-guaranteed portion is currently $19,942, summing up to $51,181. Let's assume I get $50,000 upon maturity. The IRR in this case is around 2.5% (per year over the 21-year tenure). That feels 'okay' but nothing fantastic.

What happens if the non-guaranteed portion doesn't do so well, and I only get $40,000 upon maturity? The IRR falls to a very dismal 0.31%. That's not a very good "investment" at all, is it? 

Now, here's the twist:

For simplicity sake, let's assume I have only two options, (A) surrender the policy immediately, and (B) hold the policy to maturity. Let's ignore the fact that I can surrender the policy 1, 2, 3, 4...8 years from today.

In (A), I collect $20,000, and I am unshackled from this policy. I can use this $20,000 to invest in whatever way I wish.

In (B), I forego collecting $20,000 today, I commit to paying ~$1800 per year for 9 more years, and I stand to collect between $31,000 to $51,000 upon maturity. If I collected $50,000, my IRR for this 9-year period is around 5% p.a. Wow, this now looks very appealing! (Note though, that if I collected $40,000 instead, my IRR for this 9-year period is 1.43%.)

So the real question is, if I went for (A), do I think that I can make a return of more than 5% on the $20,000 + the $1800 per year? If I don't think I can do that (e.g. if I simply dumped it into the DBS Multiplier and assuming I could get the maximum interest rate of 3.5%, or even assuming I ploughed it all into Singapore Savings Bonds), then actually, I am better off with option (B).

This set of  rough calculations aim to illustrate a few points:

• It is usually quite painful to terminate an ILP early. The benefits tend to be back-loaded, incentivizing the policyholder to hold the policy to maturity. However, this means an extended period of exposure to the performance of the company's Fund - you have no say over what they do/don't do and you can only hope they hit the 5.25% return over the full tenure (in my case, 21 years) so that the non-guaranteed component fully materialises.
• If I ended up with the $40,000 outcome at maturity, perhaps I would comfort myself that some of the opportunity cost of my money went towards paying the insurance aspect of the policy. That would be scant comfort, since the death coverage (guaranteed component) is not even $50,000 and you can easily buy term insurance for $100,000 coverage at a much lower price.
• Hence, the policyholder is really beholden to the vagaries of the policy (from an investment POV) and is seriously overpaying (from an insurance POV).

I still haven't figured out whether I will continue with the policy, or bite the bullet and suffer the consequences of early termination. The $1800 a year could be easily invested elsewhere, but it entails a certain risk. Investing in essentially risk-free products (like Singapore Savings Bonds) is definitely out, since they only yield 2.x% at present. Even the 4.x% Astrea IV bonds does not look good compared to the potential 5% yield if I stay the course with the policy. 

The main reason why I'm faced with the above dilemma is that the ILP product itself is really quite complex, and demands detailed analysis of one's objectives and time horizon. It is perhaps an unnecessary burden that I want to wish away, but unfortunately am unable to. Now it is simply trying to make the best of the given situation.

Looking for value - case study on Micron

The following is a sharing on an approach to identifying market opportunities, and should not be regarded as a stock recommendation. Please do your own due diligence (DYODD) before making any investment decisions.

Micron Technology Inc. (MU)

One of my favourite early success stories when I began trading USD-denominated stocks is that of Micron Technology. I was no stranger this semiconductor company, as it is one of the major manufacturers of memory products (alongside Hynix, Crucial, Kingston and others) that I had come across back in the days when I was into DIY PC stuff.

It was around early 2016 when I first looked at Micron stock. I remember forming the quick impression that the stock was possibly undervalued, simply from its P/E ratio. I did not have the impression that it was a poorly-run company, and I felt that with memory-intensive products like mobile phones and other smart devices becoming increasingly proliferated globally, there was very little downside.

chart from Yahoo Finance

If you look at the above chart, you see evidence of the cyclical nature of the semiconductor industry. Read a bit more from online literature and forum discussions, and you'll appreciate how this is due to certain characteristics of this industry. During periods of strong demand, semiconductor firms are likely to undertake large capital-intensive investments to build new plants and increase production capacity. However, these take around a few years to materialise, and by then, the market conditions may have changed, leading to over-capacity and consequently depressed prices. The lagged response of new supply to meet (past) demand leads to the volatile cycles reflected in Micron's share price - think of what would happen if Uber's surge pricing worked like it did today, but that any additional cars deployed were only able to hit the roads 6 hours after the surge started, for whatever reason.

But in 2016, I looked ahead and found it hard to believe that the strong demand for memory products would abate. While mobile phone penetration could begin to taper, there were many new products (e.g. smart cars) that could easily take their place in terms of needing memory chips of various kinds. Yet things just looked lacklustre for Micron stock, so I probably thought to myself at that time, "how bad can it get?" and decided to start a position.

Here's a brief chronology, up to September 2017:

• February 2016: Entered at $11.30
• May 2016: MU went down even further, and I picked up more at $10.25 (you could say I was thinking of dollar-cost averaging, I honestly can't recall - but the sharp readers would pick up that I was actually 10% down from when I first entered at $11.30, and I was now putting more money into the position...)
• June 2016: Stock recovered to $13.85 and I sold. Watched in awe as the stock climbed thereafter
• May 2017: Felt left out of the game, re-entered at $27
• June 2017: Took profit at $32 (around 18% gain)
• July 2017: Re-entered around $29
• September 2017: Took profit at $35 (around 20% gain)

Today, the stock trades close to $60. I'm well aware that if I had stayed the course from when the stock was trading in the low teens, I would be looking at a 400% to 500% return. Instead, I merely picked up the 'scraps' along the way. But those were some helluva valuable scraps - giving me a few dozen times the return I would have gotten if I had left the money in a bank account, and still a few times better than the best CPF interest rate available.

I'm happy that I made money, but it's also apparent that my preference for taking profit quickly led to periods of time out of market during which I gave up significant gains while the money was sitting around probably earning next to zilch interest. Especially in a volatile market, there is an overwhelming tendency to trade rather than to invest. Trading is kind of exhilarating, but unless you can make your transactions with very low fees, the happiest person is probably going to be your broker. Also, if your portfolio comprises a more than a dozen stocks, it is next to impossible to keep up with all the market on-goings, unless one is doing this full-time.

Regardless of the time horizon of your investment (intra-day returns all the way to multi-decade) and how you end up executing it, I think there are certain core principles that the example above elucidates. I highlight what I think are the three key takeaways that can apply to any and every situation:

1. Understand the product you are investing in. In the internet age, there is an incredible amount of resources, opinions, reports and what-not around to absorb. Supplement that with your own experience and observations where possible. I started a position in Panera Bread because I frankly thought their offerings made a lot of sense for an increasingly health-conscious North American population with a moderate-to-high level of disposable income. (Too bad I didn't hold on until PNRA was acquired at a significant premium!)
2. Look for value... There are simple metrics like P/E ratio, Price-to-NAV etc. that can be used to compare across firms in the same industry. I previously applied this to American Airlines when it was trading at a steep discount to its competitors (despite a well-executed merger with US Airways), and that worked well - when Warren Buffett subsequently added to his position in AAL, I was happy to benefit from the positive externalities of his halo effect!
3. ...But only in good companies. The quote attributed to Buffett, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price" is self-explanatory.

In my experience, I have found it a lot easier to identify potential investment opportunities in US markets compared to those listed in Singapore, because the offerings in the latter are much more limited. Still, I think the principles above are pretty much universal, so I suggest that you bear them in mind the next time you gear up to make an investment decision! 

Rethinking the CPF

For many Singaporeans, the Central Provident Fund (CPF) Scheme is something of a black box. CPF members are broadly aware that every month, a certain percentage of their salary gets whisked away into their CPF, not to be seen until retirement. They may also know that the amount contributed to their individual CPF gets allocated into the Ordinary Account (OA), Special Account (SA), and Medisave Account (MA) based on a certain formula, and that the CPF currently pays pretty generous risk-free interest rates of 2.5% for OA and 4% for SA and MA.

(Did you know that CPF's interest rate calculation works quite differently from a typical bank savings account? You will get a little bit more in a bank savings account that pays 2.5% compared to the CPF OA. For details why, read Wilfred's Ling post here. In a nutshell: no interest-on-interest, and CPF uses a "monthly lowest balance" concept rather than Average Daily Balance.)

And most Singaporeans will also know that while the CPF Scheme was originally intended to safeguard retirement savings, it also has been a key pillar in supporting homeownership, especially for many first-time homeowners.

Some discussions have emerged following a recent suggestion by economist Walter Theseira that the policy allowing the use of an individual's CPF monies for property purchase should be discontinued. Previously, I would have concurred with this suggestion. But after much further thought, my opinion has evolved substantially , and I explain this in detail below.

Before: CPF as a retirement safeguard

With constant rhetoric regarding our country's ageing population, the need to save for one's retirement, and the increasing life expectancy of Singaporeans, compulsory contributions via the CPF Scheme is a sensible way to set aside retirement funds.

I hence found it worrying that many Singaporeans use a significant proportion of their CPF OA monies to fund property purchase. While this could have reaped sizeable returns in the past (when housing prices grew very quickly), I felt that the future would pan out very differently, especially considering that the majority of housing in Singapore is on 99-year leases and hence should behave akin to a 99-year depreciating asset.

The fact that many homeowners reaped significant returns on their investment led to a widely-held belief that buying residential property (especially a Build-To-Order HDB flat) was a surefire road to prosperity. This belief arose from a "perfect storm" of sorts, where property prices were on the up-trend in general in the 1990s and 2000s, and the Government's introduction of the Selective En-bloc Redevelopment Scheme (SERS) in 1995 gave homeowners the impression that the Government would step in to intervene before the 99-year leases expired (at least for public housing).

A key turning point came during the 20 January 2014 Parliament session, where MP Gerald Giam asked a question on what will be the value of an HDB flat once it reaches the end of its 99-year lease. Then-Minister for National Development Khaw Boon Wan's reply:

"Like all leasehold properties, HDB flats will revert to HDB, the landowner, upon expiry of their leases. HDB will in turn surrender the land to the State." (for the full Q&A, refer to the Hansard)

This left no doubt that the value of an HDB flat (and, by extension, any other leasehold property) will be zero at the end of its lease. Presumably, the value of such property should begin to approach zero at some point during it lease, but this was opposite to what could be observed among historical residential resale market transactions .

There remained a lingering sentiment among Singaporeans that the Government would still step in at some point and do something, as there was no way that the Government would kick owners of HDB flats out of their homes, even at the end of the leases, as such action would incur extreme political cost and risk of political upheaval (unthinkable!). The idea simply felt too contradictory to the homeownership narrative indoctrinated into most Singaporeans from a young age through National Education programmes. SERS, which gave owners of ageing HDB flats the opportunity to relocate into brand-new HDB flats, looked like the solution to this quandry. Given the not-insignificant windfalls that SERS projects bestowed upon its fortunate recipients (partly due to Government policy to renumerate affected SERS projects at values comparable to market rates), there even emerged a group of prospectors whose key goal was to identify potential SERS sites, for speculative property transactions.

Fast forward to March 2017. In the MND Singapore blog, Minister Lawrence Wong bravely tackled the bull by the horns. His pronouncements - that (i) a strict selection criteria is used for SERS, and (ii) the vast majority of flats are not likely to undergo SERS - finally stirred a broader realisation among the home-owning population that 99-year leases are what they are.

This year, serious discussions have been given media limelight, and the plight of affected homeowners in Lor 3 Geylang (who will be asked to leave in 2020) added fuel to the fire. Many who once held sanguine views on the sacred cow of homeownership despite dwindling residential leases may have finally become more attuned to the realities.

With this thinking, I was staunchly of the view that the CPF Scheme, having been set up for retirement purposes, ought not to be intertwined with property purchase. After all, those who use their CPF monies for property purchase are required to pay back accrued interest upon sale of the property. This meant the homeowner would "owe" CPF 2.5% of interest per year,  compounded over time. Could the value of leasehold property appreciate at 2.5% per year? Does this not contradict the expected behaviour of a 99-year depreciating asset? To me, current policy permitting the use of CPF monies for property purchase would potentially lead to future retirement inadequacy, and ought to be reviewed from first principle.

The Re-think: A new CPF Housing Account?

When Walter Theseira suggested that Singaporeans should not be allowed to use CPF monies for property purchase, it seemed conceptually aligned to my prevailing thinking at that time. However, while I agreed with his idea in principle, I felt that it would be politically untenable to actually implement it. I thus brainstormed ideas on how policy wonks could actually carry out such a policy change without too much public backlash.

The idea I came up with was to establish a new CPF account, which I will refer to as the Housing Account (HA). Existing alongside the OA, SA and MA, the HA would receive a certain amount of monies from the member's CPF contribution, and the CPF member would be allowed to utilise the full balance of the HA for property purchase.

Creating yet another CPF account type would no doubt be confusing for most laypeople (in any case, making things easily-comprehensible isn't a key priority of policymakers, judging from the past), but it would afford the Government flexibility in determining policy such as (i) proportion of CPF contributions allocated to the HA, and (ii) the conditions governing the use of HA. For example, to encourage homeownership, they could set the HA allocation to be higher for young adults (and lower the allocation rate of the OA, SA, or MA accordingly), and then reverse it for older Singaporeans. The HA interest rate could be identical to the OA interest rate, leaving CPF members no worse off than before. But most importantly, by performing a gradual adjustment to the HA policy over time, the Government could potentially guide towards progressively smaller HA allocations, thus decreasing the proportion of CPF members' monies permitted for use in property purchase. Then maybe in two decades' time, the Government could do away with the HA altogether, and voila, CPF monies are no longer allowed to be used for property purchase.

Further catalysts: "Is 2.5% good enough?" and "Why does HDB drain my OA?"

Very recently, I undertook a fundamental re-look of my own portfolio and capital allocation, which led to me changing my view of a 2.5% risk-free interest rate from "quite good" to "not good enough". (For more details, see my earlier post.)

Because of this, I began to question the wisdom of leaving money in the OA to earn 2.5% per annum - even though many CPF members do precisely this. I had previously done a CPF transfer of my OA to SA, to benefit from the higher interest rate of 4% (5% on the first $60k). It dawned upon me that the bona fide retirement vehicle within the CPF is actually the SA, and that the restrictions on withdrawing funds from this account is in line with such a purpose.

I began to wonder how I should revise my view of the purpose of the OA, when over lunch with a friend, I was reminded of something that came to my attention a while ago. At that time, it had struck me as odd - the current policy where, if a HDB buyer chooses to take a HDB loan (instead of a bank loan), he/she is required to wipe out their entire OA balance before using cash. From HDB's website:

Use of CPF savings
If you take an HDB housing loan to buy or take over an ownership of a flat, you will have to use all the savings in your CPF Ordinary Account for the purchase or takeover before an HDB housing loan is granted for the remaining amount.

Given that the interest rate on a HDB loan is 2.6% (0.1% higher than the CPF OA interest rate), while interest rates for bank loans - where you don't have to wipe out your OA monies - is lower at around 2%, this felt like a rather strange policy. On one hand, CPF monies are supposedly intended for retirement, while on the other hand, the Government's own policy mandates those who take HDB loans to drain out their retirement funds (to buy a 99-year depreciating asset) before any cash is used. Hmmm.

Now: A revised perspective of what the purposes of the OA and SA are 

And it then dawned upon me:

This CPF Housing Account idea already exists today - in the guise of the Ordinary Account!

This was a paradigm shift and I had to shed certain preconceived notions that the OA is an integral part of "retirement planning", but once I did that, it became a lot clearer to me.

Here's what I now think:

• The Special Account is the real heavy-lifter for retirement planning. The 4% interest rate (5% on the first $60k) is pretty good, and compounding will bear fruit. But most young adults might not pay a lot of attention to the SA because (i) most of our CPF contribution goes to our OA instead, and (ii) we can't do much with our SA beyond some highly-restrictive CPF Investment Scheme options.
• The Ordinary Account should not be perceived as a retirement account, but treated more like cash. Well, HDB and CPF apparently concur that it makes sense to mandate HDB buyers who take HDB loans to drain the full balance of the OA, so why should this not apply to other groups who take bank loans for property? In any case, the OA interest rate of 2.5% is not very attractive if you really want to set aside funds for retirement. If you are planning ahead for retirement and don't foresee needing your OA funds, you'd be better off making the irreversible transaction from OA to SA as early as possible, and benefit from the compounding.
• The Medisave Account is, well, what it is. I honestly don't know much about it so I can't really comment, but its usage is highly-prescribed and there's no option to invest it as far as I know. So you're stuck with 4% interest rate (pretty good) and just hope that you don't have to tap on it till you're a lot older.

My revised view also means that I no longer agree with Walter Theseira's proposal, but more because of semantic reasons than actual ideological differences.

Implications & Conclusion

So what does this mean for CPF members? Here's my two cents, but depending on your financial situation, your priorities and objectives may be different.

• If you are not cash-strapped, top up your SA with your OA funds. (Other sites cover some reasons why you should or should not.) Currently, the first $60k of CPF monies enjoy an additional 1% of interest, but only $20k of your OA can benefit from this. 
• If you have $45k in your OA, $9k in your SA and $6k in your MA (total $60k), you are not earning the 1% bonus on the full $60k. You are only earning it on 20+9+6= $35k. 
• If you top up $25k from your OA to your SA, this $25k earns 5% total interest instead of 2.5%, and the difference will be sizeable over time due to compounding.
• Consider how you want to use your OA monies
• This is very dependent on individual preference. Given that CPF Investment Scheme requires setting up a CPF Investment Account with recurring custodian fees, I am not very keen on the CPF-IS. I hope that a new player will come in an shake up this market segment, but given its barriers to entry, I think it is unlikely, so the banks can continue to charge what they like.
• If you use OA for property purchase, consider carefully the prevailing interest rate environment in relation to the CPF interest rate. If your property loan is above 2.5%, you probably want to use CPF OA monies to service the loan, since you will be worse-off if you use cash
• You may also use CPF OA monies for education
• If you have no use for the CPF OA monies, it may be worth using the OA to top up the SA. You'll jump from 2.5% to 4% (or 5%, see earlier example), which is not small. You want the compounding to start earlier rather than later, for it to work its magic.

The key change here is viewing the SA as the retirement vehicle rather than the combined OA+SA as a retirement vehicle. The big unanswered question is, how much does one need for retirement? Without an answer to this question, it is difficult to decide how much to set aside the SA. 

At least for CPF monies, one way is to look at the trend in the CPF Minimum Sum/Full Retirement Sum. Although it was promised in 2014 that the Minimum Sum (then $161,000) would not increase, the direct replacement of the Minimum Sum is the Full Retirement Sum and it has gone up to $181,000 for those turning 55 in 2020. 

I turn 55 in 2044, so there's a good many years to go. From the looks of it, it will almost certainly be more than $250,000. For illustration, based on a 2.5% annual rate of increase, we're looking at almost $330k if the $181k figure is extrapolated by 24 time periods. That's a princely sum compared to my meagre CPF balances today. It just means that it's even more important to let compound growth do what it needs to do, and that 2.5% on the OA monies is probably not good enough. Got to strive for more robust returns!