Would You Like To Double Your Money?

What on earth are you doing?” I asked my lunch guest, as he forensically examined his knife and fork.

He then proceeded to turn over his side plate to study the trade mark. He nodded with approval.

He pointed out that information – no matter how trivial – is around us all the time. We only have to open our eyes to see it. “What’s more it is free”, he added.

Did I mention that my friend is a banker? So it’s true – once a banker, always a banker.

Extraordinary returns

Consider an insight that I chanced upon in the Business Times. It discussed, in detail, the returns that we, Central Provident Fund members, could expect to earn on our money.

It turns out that there is a two-thirds chance that the fund could deliver returns of between 4.3% and 7.1% on our cash.

Unbelievable, I thought to myself. That is, indeed, extraordinarily high, as I picked up my jaw from the floor. A 7.1% return would imply that our money could double in around 10 years. Marvellous!

But then something crossed my mind. Has it crossed yours yet?

What could the Central Provident Fund (CPF) be investing in to achieve, albeit only statistically, returns of as much as 7.1%?

Whatever it is, I want some of it too.

It seems that our CPF money is pooled with the Government’s money and invested through the sovereign wealth fund manager, GIC.

The interesting bit

The secret of the returns, according to a feature published on the Central Provident Fund website, is “…to ride out the market cycles by taking losses when markets go down, knowing that it would ultimately stand to gain when markets go up again later”.

That sounds remarkably like the kind of thing that Warren Buffett, Peter Lynch and we, here at the Motley Fool, believe in too.

Peter Lynch said: “In the long run, a portfolio of well-chosen stocks will always outperform a portfolio of bonds and a money-market account”.

Warren Buffett was more colourful. He quipped: “No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant”.

Both Buffett and Lynch were referring to the power of compounding. This is the crucial part of investing that some investors either don’t understand or don’t want to understand. That is until it might be too late to understand it.

Patience is a virtue

Many investors are impatient. They want shares to double in less than a couple of years. Those stocks, I should point out, are rarer than finding sirloin steak in a vegetarian restaurant.

Instead of betting on quick wins, it might be better to look for quality companies that could grow modestly but sustainably.

But here is the best part about how our CPF money is invested. By focussing on the long term, the money could be invested in riskier assets such as equities, real estate and private equity.

Most of us can’t even get close to private equity funds, let alone recognise private-equity fund managers if they should sit next to us on the MRT.

But we can easily build a portfolio of equities and real-estate assets. Over the last 12 years, the Straits Times Index Exchange Traded Fund (SGX: ES3), which mimics the performance of the Singapore benchmark, has delivered an annual total return of 8.5%.

Do it yourself

The Exchange Traded Fund (ETF) would give us exposure to the 30 biggest quoted companies in Singapore, in one fell swoop.

In other words, the ETF would provide geographic diversification, industry diversification and company diversification. These would be through blue-chips that include SingTel (SGX: Z74), DBS (SGX: D05) and CapitaLand (SGX: C31).

You could even do it yourself by building your own portfolio. That is the easy bit.

The difficult part is to take short-term market volatility in its stride. But remember this about volatility: The difference between market-volatility and market-stupidity is that market-volatility has its limits.

This article first appeared in Take Stock Singapore

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.