The ongoing trade wars have spooked US markets, with the Nasdaq entering correction territory and the S&P 500 approaching it.
With little available capital and reluctance to cash out on my income counters, I initially do not have any intent to act on it.
However, as I was writing my previous post on portfolio allocation, a thought struck me, “How about utilising the fund in my CPF Ordinary Account (CPFOA)?”
After some quick checks, I decided that the idea is feasible, due to the following three reasons.
First, even with the intended investment, only slightly over 50% of my assets (excluding my residence) would be exposed to equity, a fairly conservative allocation for an experienced investor.
Second, the investment will at most push my growth stocks allocation to the upper limit. Hence, my overall game plan stays in tact.
Third, with US markets’ long term return at around 8-10%, I stand a good chance of getting a return better than CPFOA’s annual interest of 2.5%. This is especially so if I initiate the investment during a downturn.
Deployment plan
Having established the rationale, I have developed a plan to deploy my capital in four tranches, as illustrated in the image above.
Loosely based on historical market data, the triggers and deployment amounts were strategically determined.
Market corrections, with declines of at least 10%, occur far more regularly than market crashes, defined as 20% or more. Therefore, a greater proportion of funds will be deployed during corrections.
As for crashes, the initial trigger of a 25% decline is based on past record that most historical crashes surpassed this level.
Furthermore, to mitigate impulsive investment decisions, a three-trading-day cool-down period will be applied prior to fund deployment.
It is important to note that this plan serves as a guide, and adjustments may be necessary depending on various factors, including the rate of market decline.
What will I buy?
It’s unfortunate that CPFOA cannot be used to invest in World/US Equity Exchange-Traded Funds (ETFs) directly. Interestingly, it’s through the writing of this article that I found out the rationale behind this limitation.
In the written response provided by Ministry of Manpower to a parliamentary question, this is to safeguard CPF members interests, as these “foreign products are subject to changing regulations in jurisdictions outside of the Government’s regulatory oversight.”
Based on my recent research, the best alternatives appear to be the Amundi Index MSCI World Fund and the Amundi PRIME US Fund, both currently exclusive to the Endowus platform.
While I’m hesitant to add another platform to my portfolio, the compellingly low total expense ratio of no more than 0.10%, compared to over 1% for other active funds, makes Endowus an attractive option.
Of the two, I’m leaning towards the World Fund. Although it has significant US market concentration (over 70%), it offers broader geographical and sector diversification. Furthermore, its trailing 3-year annualised return of 9.3% is only slightly lower than that of the US fund.
Waiting for Opportunity
I’m excited about the potential of this plan! However, given my existing market exposure and the reliable 2.5% return from my CPFOA, I’m adopting a strategy of patience.
I consider these funds an opportunity reserve, intended for strategic deployment when market downturns offer compelling entry points.
Additionally, unlike my individual holdings, my time frame for these investments is likely to be much shorter – maybe two to three years.
My next homework will be to define specific exit points based on targeted returns.
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