Hi, I’m Mr. Lim and I’ll be turning 50 years old this year. My question is: ‘Should I withdraw all or a portion of my EPF Account 2 to invest in the stock market?
It depends on how good you are as a stock investor.
Presently, there are many people who believe that stock investing can generate double-digit returns, which is higher than the 10-Year Dividend Yield Average of 6.17% per annum delivered by the EPF from 2010 to 2019.
So, is stock investing better?
First, I believe one should understand that the 10+% returns are not cash based as delivered by the EPF. Often, the 10+% refers to trading gains that are derived from buying stocks at low prices to sell them at high prices at a later date. Thus, the 10+% returns are not guaranteed, predictable, or even recurring in nature.
Second, what most people think is stock investing is not exactly stock investing. It is betting. What is the difference? Well, if Mr. Lim is one who studies a stock’s business model, financial results, and future plans before investing into it, then, he is more likely a stock investor. But, if Mr. Lim wants to buy stocks because he anticipates that they will rise in the future and the purchases are made without any study of the stocks’ business performances, then, Mr. Lim is betting.
As I write, I find many people who have a desire to achieve superior returns like 10+% per annum from the stock market. But, most of them have failed or failed to achieve such returns consistently because they do not appreciate the virtues of portfolio management. In other words, many focus on getting the 10+% but, had failed to consider other key elements such as stability, growth and diversity to their own investment portfolios.
Thus, the question I would ask Mr. Lim is whether or not he can generate 10+% in returns, consistently without fail, from stock investing?’
It is one thing to make 10+% in returns in 1 year. It will be another feat if he can replicate his success and make 10+% in returns consistently every single year.
The key word here is ‘consistency’.
In this article, I’ll share how the EPF invests our money and more importantly, is able to continue on declaring future dividends to us as contributors. If you wish to learn how you can build a stock portfolio where you could consistently attain higher returns than the EPF, I’ll share my pointers at the end of this article.
#1: EPF’s Strategic Asset Allocation
The EPF employs its Strategic Asset Allocation (SAA) as a framework to optimise its long-term investment returns. EPF allocates 51% of its total investments into Fixed Income Instruments for capital preservation, 36% into Equities to grow its returns, 10% into Real Estate to hedge against inflation and the remaining 3% is into Money-Market Instruments to fund its day-to-day operations.
In essence, it is likened to a person who has RM 100,000 in capital to invest and parks RM 51,000 into FDs, RM 36,000 into stocks, RM 10,000 into REITs and the final RM 3,000 is left in his savings account for living expenses.
#2: EPF Invest Primarily for Income (Cash Flow)
The EPF earns multiple recurring sources of income from its investment assets. They include interest income from fixed income instruments, dividend income from equities, and rental income from real estate. Combined, the amount of its recurring income has increased from RM 16.2 billion in 2009 to RM 32.6 billion in 2018. They have contributed about 65% of EPF’s gross investment income for the past 10 years, which is key to its investment success and consistent delivery of the 6+% in annual dividends to its contributors.
#3: EPF’s Stock Portfolio
The EPF has built itself a global portfolio worth RM 300 billion in 2018 where its key markets are in Malaysia, Hong Kong, the United States and Singapore. Here, let us just focus on the EPF’s top 30 equity holdings in Bursa Malaysia. From the list given, I have discovered the following:
1. Sector Selection
The EPF places great emphasis on stocks that are cash cows. This is evident as it is the largest investor in our nation’s finance sector with 9/30 stocks are finance stock such as RHB, MBB, PBB, CIMB, MBSB, HLB, BIMB… etc. Also, it has a focus on the palm oil sector, REITs, and telecommunication stocks, which are basically income and cash flow orientated.
2. Holding Period
EPF has held onto 28 of these stocks for more than 10 years. It made sense as it intends to earn dividend income from these stocks as dividend income is a vital source of income to allow the EPF to pay recurring dividends to its contributors for the long term.
3. Financial Results
However, out of its 30 stocks invested, 12 have generated consistent increase in earnings for the long-term (5-10 years). The other 18 stocks have experienced a fall in earnings during the period. As a result, this leads to our next discovery:
4. Stock Price Movements
Out of its 30 stocks, the 12 that had consistent growth in earnings have enjoyed sustainable capital appreciation in the 10-year period, except for MBB for it has DRIP which requires a different way of assessing one’s total investment returns. Stock prices of KL Kepong, Sime Darby Plantation and IOI Corporation had been flat. Meanwhile, 13 of its stocks have experienced a prolonged decline in stock prices and the balance two stocks have wild fluctuations in stock prices over the last 10 years. This means, even the EPF is not immortal in stock investing. Nobody is.
#4: What Works for EPF’s Stock Investments?
If we look at the 12 stocks that have appreciated in stock prices in 10 years, the common ground is that these stocks have achieved consistent growth in profits for the long run. Consistent growth in profits lead to a stock’s consistent growth in its stock prices. That is, in essence, value investing 101.
#5: Should Mr. Lim Keeps His Money in the EPF?
Back to Mr. Lim: Is it better for him to keep his money in the EPF?
Based on EPF’s financial reports, I discovered that the EPF has built a diversified portfolio of assets that are cash-flow orientated. With continuous contributions from existing contributors and its dividends reinvested back into the fund, EPF’s ability to continue making consistent dividends to contributors is intact. Hence, if you are Mr. Lim and don’t know how to invest, it would be better to just leave the money in EPF and enjoy the annual dividends.
Next question: Should Mr. Lim diversifies a portion of his savings into unit trust funds via i-Invest?’
Here is my short answer. First, if Mr. Lim does nothing about it, he would collect 6+% in net dividend yields from his EPF. That is cash returns. Second, if he is not into cash returns but capital gains, maybe, it is a good idea for him to shop for a portfolio of unit trust funds. With that said, capital gains are gains that are not guaranteed. He may incur capital losses if the funds he chose fail to do well. So, it depends on Mr. Lim whether or not he prefers his EPF funds to be exposed to unit trust funds.
Conclusion: Can I Invest in the Stock Market and Beat EPF’s Returns?
That depends on whether or not you are a good stock investor. For most, stocks have been treated like lottery tickets where they were bought in hope that they will somehow magically increase in prices in the future. That is flawed thinking. If you wish to explore how you can build real wealth through stock investing, I’ll like to invite you to attend this 90-minute webinar so that you’ll get an idea on how real investors build long-term sustainable wealth through stock investing.
Then, you decide whether or not you should get into the stock market.