Losses affecting one's precious retirement savings are painful, especially for seniors who might lack a second chance to accumulate more funds. Sadly, this befell 45 per cent of CPF members of all ages who chose to move their money over the last 10 years from the Ordinary Account to shares, bonds, unit trusts and other instruments under the Central Provident Fund Investment Scheme (CPFIS). Conceived in 1986 as the Approved Investment Scheme, its aim is to offer members "the option to earn potentially higher returns". A process of liberalisation saw this become the Basic Investment Scheme and Enhanced Investment Scheme. These morphed later into the CPFIS, which will now be reviewed again. A government-appointed CPF panel last month recommended a low-cost investment option that offers a smaller number of funds that do not require active management.
When rules were changed earlier, an upsurge in investments followed which, as observers noted, coincided with times when the STI was relatively close to its peaks. Buying during heady periods, when investors feel they might have the Midas touch, and selling at low points when one can no longer bear to hold the "dross" is, of course, no way to manage vital funds for old age.
A sobering fact is that those who were unadventurous and had left their money in the Ordinary Account did better than 80 per cent of members who invested via the CPFIS and incurred various investment fees as well which ate into their yield. Savings left in the Ordinary Account were guaranteed 2.5 per cent interest per annum. CPF members now get interest rates (reviewed periodically) of up to 3.5 per cent on their Ordinary Account savings; up to 5 per cent on their Special, Medi- save and Retirement Account money; an extra 1 per cent on the first $60,000 in combined balances; and a further 1 per cent on the first $30,000 held by those aged 55 and above.
Despite these numbers, there will always be many CPF members who feel they might be able to "beat the market" and get better returns, particularly if they start young and stay the course. While it's important to continue giving Singaporeans the scope to take charge of their finances, one should not forget the overriding duty of the CPF to safeguard the savings of Singaporeans by setting certain parameters. Importantly, CPF members must acquire a basic level of financial literacy, at the very least, before they plunge into investments. A fundamental rule of the market is that higher returns inevitably come with higher risks. Further, asset values fluctuate over time in a roller-coaster manner. To make matters more complicated, monetary policies are not in sync across the world, and capital flows are volatile as big players search relentlessly for yield. Amid this churn, it pays for the CPF investor to exercise due care.