Investing in Bear Markets

The financial meltdown arising from subprime losses may have been the first event in a multi year economy downturn. Property prices are down, foreclosures are up, banks are getting more selective in their loans and stock markets have been on a downward trend.

Is the bear market already upon us? In the near short term, it is highly probable that stock markets are going to continue their downward trend though some bounces will occur when oversold levels are perceived.

Is it time to exit the market and hold cash instead? Cash is king but such downturns are the best investment opportunities for those with spare cash on hand. Pick up stocks with solid fundamentals. During the last downturn, the market darlings were companies with strong balance sheets or a large cash pile to back them up. Blue chips that regularly paid out dividends were also highly preferred because of the stability they accorded. It even spawned unit trusts such as First State Dividend Advantage and SGAM Singapore Dividend Growth.

Pick up stock bargains now. Go contrarian and the rewards will be reap when the economy turns around and fairly valued companies shine through.

CPF Changes for an Ageing Population

Prime Minister Lee unveiled quite a few proposed changes to the Central Provident Fund (CPF) Scheme during his national day rally speech and the changes have been debated in Parliament recently.

Quite a few changes have been proposed to address the ageing population the country is facing. Top of the list are measures to encourage re-employment of older workers, followed by increases in the CPF interest rates and lastly, and most controversial, measures to make savings last for life expectancy.

While official statistics show that more people are living till an older age, the cold hard facts do nothing to address the perceptions that these statistics do not apply to the individual. The common view on the ground is still that the government has once again moved the goalposts and made our money out of reach; everytime one moves near the markers where we can lay our hands on OUR money, the criteria is moved so that the marker moves that slightly further out of reach... Will people ever live to enjoy the fruits of their many years of labour, to pocket the money that had been kept out of their reach for decades.

Already, today's retirement age at 62 is being moved to 67. The age of 67 is definitely not cast in stone. In another decade or 2, will it be possible that the retirement age is moved even further to 70 years old or beyond? I doubt it not. It may even eventually reach a stage where retirement age is scrapped and people are given the option to work till the day they drop dead.

What about increasing the interest rates on CPF savings? An additional one percent on the first $60,000 in the CPF accounts will definitely be welcomed but the catch is that the initial $20,000 of the Ordinary Account can no longer be invested under the CPF Investment Scheme for higher returns. Furthermore, the Special, Retirement and Medisave Accounts (SRMA) will no longer offer fixed interest rates but instead be pegged to a long term bond rate.

Not being able to invest the first $20,000 of the OA is likely to impact the potential returns that can be obtained by those who are financially savvy. Utilising the money to buy into stable dividend-paying blue chips is highly likely to yield returns beyond 3.5%. The long term bond rate is also an unknown. Will it better the 4% that CPF currently pays on the SRMA? While past data appears to indicate that CPF members will be able to expect similar or better returns, the standard disclaimer that appears on brochures of financial products must be kept in mind - Past performance are not necessarily indicative of future performance.

The one proposal that really got everyone talking is that of making longevity insurance compulsory. While this is still tentative and a committee had been setup to look at it, I really hope that the committee will eventually propose that it not be implemented. The basic idea is to get every CPF member to buy into an annuity scheme so that those who do live beyond 85 will be guranteed an income for life. Yet again, there is a catch to this. The proposal in its current form will see CPF members paying for the annuity and getting nothing back if they die before the age of 85. Why should the government stipulate how I should use MY money to subsidise others whom had not planned for their own longevity? The intention behind CPF was that individuals will be self sufficient and fund their OWN retirement with the government stepping in to help those who are unable to help themselves. The oft quoted slippery slope of welfare appears to be being tested here. While sounding selfish, there is no reason why I will want to fund the longevity costs of someone whom I do not know. If I die, my assets should be directed to the benefit of those related to me, those whom I will be most concerned about.

Personally, with the exception of the longevity insurance, I am fine with the CPF changes proposed. In reality, CPF is a retirement scheme that will not suffice to fund a comfortable retirement. For those who can, they must make alternative plans to ensure a reasonable standard of living upon retirement. Eventually, with the constantly moving criteria, being able to lay our hands on the CPF money needs to be considered a bonus. But! DO NOT dictate that I should spend my hard earned money funding the needs of someone whom had not taken pains to need his own retirement needs.

Fidelity Multi Asset Navigator Fund

Fidelity Multi Asset Navigator Fund offers not only exposure to bonds, equities and cash, but also property and commodities to improve diversification and enhance performance. Consequently, this mutual fund is able to tap into an array of opportunities globally to which many other funds do not otherwise have access. Such a more diversified asset mix is suppose to reduce the overall risk of the portfolio without forgoing returns. An added draw of the fund is that the asset mix changes accordin to the stages of the global economic cycle. Investors need not perform fund swtiching and are able to hold onto the same fund throughout the cycle, potentially reducing the hassle and costs of investing.

The major asset allocation of this mutual fund is reviewed on a monthly basis but the fund manager is free to change the asset allocation on other days if circumstances dictate and rebalance the positions daily in order to manage cash flows.

The fund is expected to achieve asset reallocation gradually reflecting the slow movement of the economy from one phase to another. While economic models suggest four different portfolios depending on the phase of the economic cycle, the transition from one to the other will be achieved progressively rather than immediately.

This mutual fund is considered to be a low to medium risk investment based on the fact that it will have no less than 30% in bonds and cash at any time and that it also benefits from asset classes diversification. The asset mix will be adjusted to reflect the prevailing trading conditions and the Fund should therefore be more resilient to downside than pure equity-based funds. Investors will do well to note that such diversified funds also typically underperform pure equity-based funds in a bullish market.

It will do well to consider adding this mutual fund to a portfolio to gain added stability. For the more aggressive portfolio, this fund may not fit as well, potential limiting the upside achievable. It may be worthwhile to consider purchasing this fund as a defensive play when the global economic cycle has been expected to have peaked.

CPF Minimum Sum, Medisave Minimum Sum to Go Up

From the first of next month, Singaporeans turning 55 years old will have to leave $99,600 in their CPF accounts under the Minimum Sum scheme. The amount is $5,000 more than the current minimum sum of $94,600 and will will apply to CPF members who turn 55 between 1 July 2007 and 30 June 2008.

Those who set aside the $99,600 fully in cash will receive a monthly payout of $790 from age 62 for about 20 years.

Likewise, the Medisave Minimum Sum will also be increased with the new amount being $28,500, up by $500. At the same time, the Medisave contribution ceiling will also be raised by $500 to $33,500.

As usual, many people will complain about the increase in CPF minimum sum since it is their money that has been "locked up". However, if we look deeper into the higher minimum sum, the raise in minimum sum will likely have effect on 2 different distinct groups of people, the low income and middle income groups. High income earners can be effectively exclude from any analysis since CPF is not likely to suffice to meet their retirement needs and they should have had pursued alternative wealth management opportunities.

For the low income group, the raise in minimum sum will better assist them in building a dependable source of retirement funds. With an ageing population, such self reliance during retirement has a wider impact on society as a whole. Taxes can be controlled at lower levels as the working population will not have to totally shoulder the burden of providing for the retired.

For the middle income, they have been increasingly feeling the squeeze of not getting the benefits provided to the poor while striving to attain and maintain the luxurious lifestyle so envied of the rich. In the course of this pursuit, the middle income group had frequently stretched their means to the last dollar. Of course, there is also a subgroup within this strata whom live well within their means and have little issues preparing for retirement but again, it is important to focus on the fact that CPF is a basic scheme to help in retirement and those who are able to should jolly well enhance their retirement income via other avenues.

What the raise means is actually rather trivial if we consider that CPF savings does attract interest of at least 2.5% and 4% for the Ordinary and Medisave accounts respectively. The impact of these raises is most acutely felt by those who are already nearing retirement age but for those who are still active in the workforce, the compounding effect of returns over time can be harnessed to enhance the CPF sums. 2.5% and 4% are the minimum guaranteed returns but if idle sums are properly invested into the right vehicles, it will not be difficult to double the returns of the Ordinary Account and get annualised returns of 5% or more.

CPFIS Performance

"Retirement savings products turned in higher average gains in the fourth quarter of 2006, after strong growth in stock markets worldwide boosted the performance of investment funds.
More than 90 per cent of unit trusts and investment-linked insurance products (ILPs) in the CPF Investment Scheme (CPFIS) saw positive absolute returns for the three months to December, according to the latest report by Standard & Poor's (S&P) Fund Services."
- Stock advance lifts CPF savings products , 27 Feb 2007, Business Times Singapore

It is heartening to read such news in the papers even though I do not invest my CPF monies via the CPFIS after I was not able to better the interest rates offered.

Many people will be motivated by such news to actively look for investment products to beef up their retirement funds but past performance is not indicative of future performance and more likely than not, the easy money had already been made after the stock market run-up in recent months.

Recency of data will also affect our judgement and it should still not be difficult to look back a little more and realise that until recently, many people's investments via the CPFIS had not performed satisfactorily.

A rising tide lifts all boats and it is no big wonder that CPF savings products had turned in a good report card for the last quarter. However, there is a need to look beyond whatever euphoria there is and appreciate that market risks today are higher and potential gains in the well performing markets may not last for much long.

Calculated risks and diversification is key to ensuring we get good returns on our monies and eventually enjoy a comfortable retirement.