Should Singaporeans invest their CPF?

What I do: I would invest my CPF-OA, if it wasn’t wiped out for housing already. I don’t invest my SA.

Your CPF Ordinary (OA) and Special Accounts (SA) can be invested.

A summary guide is available here.

Should you invest your OA? Only if you are financially savvy.

Should you invest your SA? No.

Investing your OA – Easy in theory, hard in practice

Your OA earns a 2.5% return by default with zero volatility. So any investment you make needs to have a higher return.

A 2.5% hurdle rate is easy to beat. Any reasonable mix of a global stock/bond portfolio will do.

Nevertheless, 40% of Singaporeans have failed to do so. A staggering 20% managed to lose money over the past 5 years.

To be in that 60% that beats a 2.5% nominal return, you need to fulfill the following criteria:

1. Are you financially savvy? If you are not extremely financially savvy, I would discourage you from investing until you have more experience with financial markets.
2. Have you settled your housing needs? The most common early-midlife expense is your house purchase. If you haven’t yet used your OA to pay down your house, you should consider if you want to take risks with your house downpayment (probably not!)
3. Do you have high risk tolerance and good behaviour? CPF OA has a hurdle rate of 2.5% (3% once you factor in costs). Are you able to tolerate significant underperformance over this rate in the short term (3-5 years)? If you are not, then the 2.5% interest in CPF OA with no volatility is designed for you. You would likely fall prey to behavioural errors such as selling low and buying back in only when the market has recovered. 

For those who want to become financially savvy, check out my beginners’ guide to saving and investing.

I wouldn’t invest my SA

Your SA offers a 4% interest rate.

SA investments are restricted to low-risk, low-return products.

This is despite your SA being for the longer term and therefore more appropriate for higher risk.

But the government is more concerned with poor behaviour from investors and therefore seeks to lower behavioural risk by limiting the amount of investible risk that Singaporeans can take on.

The products on offer will rarely be able to beat a 4% return, and come with risks of losses too.

I would therefore say that CPF SA investing is a no-go from the start, and it would be a rare case where investing your SA makes sense.

Should you invest your CPF?

In conclusion, investing your CPF-OA should only be done by the financially-savvy. Considering that the alternative is a guaranteed 2.5% nominal return, I find it hard to argue that leaving CPF uninvested is a big error. 

If you want to improve your money and your life, consider whether you are saving, spending, and investing appropriately instead.