When I revealed that I did a voluntary contribution to my CPF account earlier today, someone told me he is scared of the CPF and would only contribute what is required by law.
I said that the CPF gives us relatively attractive, risk free returns. He then asked why not consider the 30 years SGS (Singapore Government Securities) with a 2.6% return and have some upside to boot.
Well, the SGS are quite different from the CPF, aren't they?
When we do a voluntary contribution to our CPF account, the contribution is apportioned to the OA, SA and MA. The OA pays 2.5% while the SA and MA pay 4.0%.
CPF money is actually long term savings, a very long term fixed deposit of sorts. The principal sum does not change. We can't actually lose money, so to speak.
When we buy long term SGS, we are buying bonds. We might get 2.6% per annum with the possibility of some upside but the possibility of downside exists as well.
Actually, a quick check over at MAS' website will show that the 30 years SGS which is supposed to pay a 2.75% coupon has fallen in price. See: Daily SGS prices.
As I believe that the very low interest rates we currently see cannot persist for many more years, buying long term bonds is a risky proposition. Why?
For bond prices to rise, interest rates have to continue falling. How likely is this? It is more likely for bond prices to fall in the coming years as interest rates once again start to rise. It is not a matter of "if it happens" but "when it happens".
I have money stored in four war chests. My CPF-OA and CPF-SA are two.
Money in these accounts earn relatively attractive, risk free returns while waiting for possibly more compelling propositions to be offered by Mr. Market.
Money in bonds is like money in equities in that they are not money in a war chest waiting to be deployed. Or am I mistaken?
1. Be cautious even as we accept higher risks.
2. Build a bigger retirement fund with CPF-SA.
3. If we want peace, be prepared for war.