This is part of our new series where we compare CPF against other financial assets.
Today, we are comparing CPF SA against DBS Bank (D05.SI) because one of our readers requested for it.
If there are other assets you would like us to compare against next, let us know in the comments below.
CPF Assumptions:
- From Jan 2000 to Dec 2019, $100 is contributed into CPF via the Retirement Sum Top Up Scheme (RSTU).
- The money earns 4% p.a. interest and the extra CPF interest is excluded for simplicity sake.
In reality, the CPF returns would be higher than what is calculated due to the extra bonus interest (up to 6% in total).
- From Jan 2000 to Dec 2019, $100 is contributed into a Regular Shares Savings (RSS) plan every month to buy DBS Bank (D05.SI).
- Shares are bought at the end of the month closing price and the plan charges a 0.88% transaction fee (OCBC Blue Chip Investment Plan).
- Money uninvested will be refunded back to your bank account.
- Results include both dividends reinvested and not reinvested into DBS Bank.
Comparison
From Jan 2000 to Dec 2019, DBS returned 8.33% p.a. (dividends reinvested) and 8.04% p.a. (dividends not reinvested).
This is higher than the 4% return given by CPF.
However, out of 240 months, DBS total portfolio value is lower than the CPF balance almost half of the time, although most of it seems to be due to the 2008 Global Financial Crisis.
Nonetheless, it still means that DBS is highly volatile as an investment.
Over the long-term, however, it seems that DBS is still a better investment than CPF, although it comes with higher volatility and more periods of underperformance.
Rolling Annualised Returns of DBS
We calculated the 5-year and 10-year rolling returns of DBS share price (excluding dividend returns).
There were a total of 181 rolling 5-year periods and 121 rolling 10-year periods.
DBS share price returned between 0% to 5% per year the majority of the time.
That means dividends probably make up about 3% or more of the total returns, making the total 8%+ p.a.
Conclusion:
The goal of investing is to increase wealth over the long-term.
The DBS grew at rates double the 4% p.a. given by CPF.
Investing in DBS over the long-term should maximise your money.
Of course, past performance is no indication of future results.
The DBS Bank may, in the next 10 years, underperform the fixed returns given by CPF SA.
Also, if you have no stomach for volatility, and is risk-averse, then maybe CPF SA might be a better retirement plan for you than DBS.
Recommended Read: The 4% Shortfall In Your CPF Retirement Fund
Side Note:
Rolling annualised returns with dividends
While we managed to calculate rolling annualised returns for DBS's share price, we were still not able to factor in dividends as part of the calculation.
If you have a way to use Excel to calculate the rolling rate of return with dividends via XIRR, please let us know.
We will work on the calculations and publish it for you.
Tax benefits with topping up to CPF SA via RSTU
Every dollar you contribute into your CPF via the RSTU is eligible for a tax deduction - if you haven't maxed out your tax deductions.
So you'll get tax deductibles of $1,200 per year based on the above scenario.
However, if you need money, you can't withdraw it from CPF.
For investing in DBS, there is no tax benefit associated unless you contribute that $100 into your Supplementary Retirement Account (SRS), and then build your RSS with the money that's in your SRS.
If you need money, you can sell your DBS shares and get back cash.
However, if you withdraw before your retirement age, 100% of the amount withdrawn will be subjected to tax.
Uninvested money returned to your bank account
If DBS shares were trading at $22.80, only 4 unit of shares would be bought, which translate to a cost of $92.00 ($22.80 x 4 units + 0.88% commission).
That results in $8.00 uninvested and going back into your pocket.
Disclaimer:
Do not make any investment decisions based upon materials found on this website.
Investment Stab is not a registered investment advisor, broker-dealer, and is not qualified to give financial advice.
Investors are reminded to do their own due diligence and invest according to their risk appetite.
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Recommended Read: Save in CPF or Invest in SPDR STI ETF?
Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?
are u sure ur column for SA is calculated correctly?
ReplyDeleteHi ymerej,
DeletePlease let us know if you spot any mistake?