Comparing CPF, Stocks and Crypto Returns

CPF, Stocks and Crypto.

At this moment, these are probably the only 3 asset classes I would consider.

I know there are other instruments out there like insurance (endowment plans), bonds and properties. However, in my humble opinion, they are either sub-optimal or out of my league, or maybe even both.

For this article, I am assuming a simple baseline scenario of:

Investing $24k a year (or $2k every month) for 20 years

I chose these numbers as they are relevant to a big proportion of readers and of course me. $2k a month is ~30% of the median wage and 20 years is a reasonably long period to compound returns. Whether it’s age 25 to 45, 35 to 55 or 45 to 65. At some point, you would have to enjoy the fruits of your labour, right?

If you think it’s too demanding, feel free to divide the $2k by 2, 5 or even 10. Of course, if you are a baller, just multiply the numbers until it is applicable to your situation.

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CPF Assessment

For an employee, mandatory contributions could easily add up to $2k a month. However, most people make use of their OA contributions for mortgage payments and MA contributions for healthcare expenses.

So realistically, one would either have to leave these mandatory contributions untouched or top up their CPF accounts periodically to achieve $2k a month of net contribution.

For simplicity, I have also assumed a conservative blended rate of 3.5% p.a. since different interest rates apply to each type of CPF account. (FYI, I have achieved a 4.5% blended rate for the past few years).

Compounding a $2k per month investment at 3.5% p.a., after 20 years, the total sum would be $680,000.

 

Pros: High interest relative to cash or bonds

• Although interest rates have declined rapidly in the past couple of decades, the government has backstopped CPF interest rates. OA at 2.5% and the rest of the accounts at 4%.
• Additional gravy of Extra Interest (EI), significant for those with lower balances, especially older Singaporeans.
• Even if there is a change in the ruling party, the CPF rates are more likely to rise than fall, at least in the short term. #populist

Pros: Predictable, Guaranteed Returns

• There are really high odds the floor of 2.5% for OA rates and 4% for MA/SA/RA rates will be maintained for the next 20 years.
• The returns are highly predictable and 99.99% of participants can achieve a 3.5% return. This is a game with zero or few losers, especially if the returns allow you to achieve your retirement goals.

Cons: $680k does not inspire confidence in retirement

• Even today, many Singaporeans do not believe $1 million dollars will be enough to retire on. Not to mention 20 years later.
• $680k can be relied on to cover basic expenses, but definitely not the frills in a country like Singapore.

Cons: CPF funds are semi-liquid

• CPF funds actually help in many emergencies, since you can use OA funds for mortgage and MA/SA funds for medical emergencies. It is not totally illiquid.
• However, it definitely cannot be used to put food on the table or cover your transport expenses, regardless of how dire your situation is.

Stocks Assessment

Stocks is a common and maybe even a default investing instrument. The masses have easy access to local or overseas stocks markets, whether it’s individual stocks, ETFs or managed funds.

It is the asset class most frequently associated with the word “investing”.

An often touted “average” figure that is used to project stock market returns is 10%. I am also not that far off a double digit percentage return after 10 years of semi-active investing.

Compounding a $2k per month investment at 10% p.a., after 20 years, the total sum would be $1.4 million.

Pros: Mature, potentially passive asset class

• There are 200 years of returns to fall back on and nobody worries about the legitimacy of the custodian, especially if you buy through brokerage arms of local banks.
• A simple and somewhat passive DCA strategy into a World ETF/S&P ETF/Nasdaq ETF would very likely have generated 10% p.a. returns for the past 2 decades.

Pros: Comfortable retirement sum

• As long as you have simple and reasonable desires, $1.4 million, especially for one retired person, is likely to provide for a comfortable retirement.
• After 20 years, it is more than 2x compared to the sum accumulated in the CPF system.

Cons: Volatile

• It was just 15 months ago when stock prices dropped >30% within a few weeks.
• “Buy High, Sell Low” is psychologically easier than “Buy Low, Sell High”.

Cons: Only 30% of participants “win”

• This is based almost purely from my own observation in the past decade or so
• Research has shown that the average investor loses money in the stock market, due to either greed or inability to stomach volatility.
• I believe less than 30% of participants over their investing lifetime are able to achieve a respectable >mid-6 digit profit from the stock market.

Crypto Assessment

This asset class did not exist a decade ago and one could be considered relatively early if he bought significant amounts of crypto as recently as one year ago.

In a nascent industry, booms and busts are aplenty, not to mention scams. There are significant risks for an investor to stomach, ranging from custodial, counterparty to smart contract risks. There is little regulation and recourse if you made a big mistake or became a victim of a fraud.

It is hard to assign an annual return to crypto but personally, I think if one cannot achieve a 25% p.a. return, then it’s probably not worth it to shoulder all these additional risks and security concerns.

Compounding a $2k per month investment at 25% p.a., after 20 years, the total sum would be $8.2 million.

Pros: Exceptional Returns

• $8.2 million after 20 years. That is a 17x return on capital and 9 digits will be able to provide for a pretty fancy retirement.
• I know some stock pickers are able to achieve such high returns but I believe the odds of a 25% annualised return over 20 years is higher in crypto than stocks at the moment.

Cons: Super-charged volatility

• Unless you are a sophisticated trader who engages in shorting, few would ever worry about upside volatility.
• Downside volatility is pretty eye-opening if you have skin in the game. Prices can go down 30% in a day, and 50% within a week, crushing notorious paper hands.
• Extreme boom and bust nature makes it harder to value protocols and build investing conviction

Cons: Passive = Broke

• The space evolves quickly and if you approach your alt coins like an index fund or ETF, be prepared to go broke.
• Requires incessant learning and evolving, which is most likely a nay for most people. But this was actually what attracted me in the first place 6 months ago.
• The only exception might be a BTC/ETH portfolio but you would still need to think about your custody solutions

Cons: Only 15% of participants “win”

• I have been lurking around Crypto Twitter (CT), various telegrams and discord channels for about half a year.
• The way most people are behaving, “majoring in the minor stuff”, they are Not Gonna Make It (NGMI). Maybe even myself since I am closer to -25% than +25% for annualised 2021 returns.
• Therefore, WAGMI is probably the most toxic psyops in my opinion.
• 15% of participants “winning” might even be a generous estimate from me, since over time, >95% of crypto projects/tokens will lose >95% of their ATH value.

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If you have read till this far, it is likely that you are still on the journey of accumulating your retirement nest egg.

Obviously, you can just focus on one of the asset class above. But more likely, you will be using a mix of at least two of them.

It’s worth considering that for a couple, if they are able to set aside $6k a month for 20 years in three equal pots to CPF, Stocks and Crypto, they might be able to accumulate $10 million.

That, my friend, is the stuff of dreams for most heartland Singaporeans.

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Thanks for reading!

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