“Every month just take abit of your salary and invest in S&P 500 lah!”
Ever came across friends & family who were more savvy in investments telling you to just DCA into the market?
With the rise of channels, websites and social media accounts spreading more financial literacy, the term Dollar-Cost Averaging (DCA) has been gaining quite a bit of traction today. More and more people are now looking to invest a small portion of their monthly income into the stock market in order to grow their wealth for the future.
What Is an Index Fund? And What Is the S&P 500?
The question now comes, “but which stock should I buy into every month?”
Company shares like Apple, Google, and Tesla are traded on a stock exchange where their prices fluctuate based on market demand and supply. Their prices often reflect the current market sentiment of the future growth of the company.
For the average retail investor, identifying the best companies to buy and what price to buy at can be a very difficult and tedious task with no guarantee of success.
Instead of investing in a single stock that is considered to be high risk, many retail investors favor putting thier money in index funds that contain a basket of stocks where the risk is spread out.
One such fund that is very popular with investors is the S&P 500 index that has an average historical growth rate of 8-10% per annum.
💡What is the S&P 500?
The S&P 500 is an index fund that closely tracks the performance of the top 500 companies in the United States. You can gain access to many S&P index funds in popular brokerages such as TD Ameritrade, iBKR, Saxo, MooMoo and many more.
S&P 500 Average Returns for 5, 10, 20, 30 Years
| Period | Average Stock Market Return | Average Stock Market Return Adjusted for Inflation |
| 5 years (2018 to 2023) | 11.33% | 7.28% |
| 10 years (2013 to 2023) | 12.39% | 9.48% |
| 20 years (2003 to 2023) | 9.75% | 7.03% |
| 30 years (1993 to 2023) | 9.90% | 7.22% |
Instead of “betting” on an individual stock, you are now essentially betting on the US market, which has been historically proven to grow over the long-term. This reduces the risk and volatility of investments.
What is the CPFIS?
The CPF Investment Scheme (CPFIS) is a scheme introduced by the Singapore government that actually allows you to invest your CPF OA and SA into various approved funds.
For instance, instead of keeping your money in the OA to earn an interest of 2.5%, more financially savvy individuals can decide to invest this amount into other funds that suit their risk appetite.
You still can’t withdraw the money until it the retirement age, but you can use it to invest in other funds that will help to compound your future value.
One must also bear in mind that in comparison, the 2.5% interest for the OA is a guaranteed rate (essentially risk-free according to CPF), whereas investments into other investment products have the potential for greater returns but also come with risks and may cause capital fluctations.
You can actually choose to invest in a number of investment products under the CPFIS such as Unit Trusts, ILPs, Annuities, Endowment Policies, Singapore Government Bonds, T-Bills, ETFs, Fixed Deposits to name a few.
Why Invest in S&P 500? Isn’t CPF OA interest of 2.5% good enough?
Whilst your CPF OA offers a decent interest rate of 2.5% that is guaranteed by the government, one major cause of concern for Singaporeans is the rising inflation rates that is likely to overtake this rate of return.
In a sense, this means that the “risk-free interest” actually isn’t entirely risk-free because there is a strong likelihood that you may be losing value to inflation.
In comparison, the S&P 500 has historically delivered a higher rate of returns with a 8-10% average year on year, albeit with fluctuations. Whilst past returns are not indicative of future returns, many investors like Warren Buffet1 strongly endorse investing in S&P 500 index funds as the best way for investors to gain exposure to the stock market.
If you start investing early on at a young age, the difference in interest compounded over a longer period of time (say 30 years) at a higher rate can be really extremely significant.
Take for example, an initial investment of $100,000 compounded annually over a period of 30 years with zero monthly contribution.
- At 2.5% interest rate: Your return will be $209,756.76 in 30 years
- At 5% interest rate: Your return will be $432,194.24 in 30 years
- At 7.5% interest rate: Your return will be $875,495.52 in 30 years
In this example2, you can clearly see how big a difference a slight increase in interest rate has when compounded over 30 years.
How to Invest In S&P 500 Using CPF?
There are many ways you can invest in the S&P 500 on your own with different brokerages. You can buy units of US-listed ETFs like VOO, SPY, SPYG that have good liquidity and relatively lower management fees.
However if you wish to invest using your CPF, you may find that the options are actually quite limited. As of this time of writing, the only way to invest in the S&P 500 using CPF is by using Endowus which allows you to invest your CPF balance into LionGlobal infinity US S&P 500 Stock Index Fund which tracks the S&P 500.
There are several requirements in order to be eligible to invest under the CPFIS with Endowus. You will need to meet the following criteria:
- You must be a CPF member aged 18 and above
- You cannot be an undischarged bankrupt
- You must keep a minimum sum of $20,000 in your CPF Ordinary Account
The CPFIS only allows you to have one CPF Investment Account with one bank of your choice. Hence you cannot have any other connected banks in order to use Endowus.
Conclusion
Ultimately investing in S&P 500 using your CPF is a personal decision that requires an understanding of the risks involved versus the alternative of earning 2.5% guaranteed interest.
It may be useful if you are young and more risk-tolerant as you may be able compound your initial capital over a long period of time. The longer investment horizon also allows you to weather any ups and downs of the current market which should normalize over a long-term.
Instead of a lump-sum investment into the market at a time, you can also consider dollar-cost averaging to spread out the risk of buying at the wrong time.
This article is an independent review and is not endorsed by Endowus or CPFIS.
Footnotes
- 1. https://www.cnbc.com/2022/10/03/billionaire-warren-buffett-swears-by-this-inexpensive-investing-strategy-that-anyone-can-try.html ↩︎
- 2. Rates are calculated using Investor.gov calculator (https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator) ↩︎