Smart EPF


Apr 2018

MANY Employee Provident Fund (EPF) members are content with the annual dividend rates generated by EPF investments. The average annual dividend rate for the past 10 years, according to the EPF website, is 6.02 per cent. If one looks at the average for a longer period, say 20 years average, it stands at 5.71 per cent.

However, there is a need to preserve your future purchasing power. That means what your future retirement nest egg from EPF will buy during your time of retirement.

Malaysia’s inflation rate in 2017 was 3.8 per cent. The average inflation rate for the past 10 years is 2.58 per cent. But the inflation each malasyian experiences is different depending on one’s lifestyle and spending habit.

The Goods and Services Tax (GST) rate in Malaysia is now 6 per cent. The effect of GST on Malaysian inflation is a question that academics in local higher institutions should be asking and researching on.

As a reference, the GST rate in Singapore is now 7 per cent. It was reported that Singapore government is set to increase the GST from 7 per cent to 9 per cent some time between 2012 and 2025 as government spending on healthcare, infrasturcture and security has gone up and is expected to increase further in the years to come.

Whether Malaysia follows the similar trend is for the economists, policy makers and law makers to debate on.

Thus it is imperative EPF members to think prudently how careful planning and actions now can help ensure that they can have a better retirement when the time comes.

Then the question to ask now is how can an EPF member make his or her money work harder? Not much can be done except to make smart use of the EPF Members’ Investment Scheme (MIS) approved by the EPF to withdraw a certain portion of Account 1 for unit trust investment.

The next question to ask now is: is it a good time to invest using EPF money now?

This is not an easy answer to give as no one know the exact trend of the equity market, especially in the short term. Different people will have different opinions. Fund houses also churn out periodical reports on market outlook and where they think the market is heading.

The market is notoriouly dificult to predict in the short term because there are many factors that will affect the stock market. Nowaways even tweets from Trump can also make the market up or down by a number of percentage points in a day.

So the advice is that instead of trying to predict where the market is heading, you should adopt some kind of averaging strategy into your EPF investing. The common one is Dollar Cost Averaging (DCA). That’s exactly that when EPF allows you to withdraw every 3 months into unit trust from your Account 1.

Thus, EPF members need to heed the advice to improve on their financial literacy and not to invest blindly.

A smarter way to make your EPF money work harder for you, especially during volatile times, is to seriously consider investing in unit trust using the value averaging strategy designed by Harvard Professor Michael Edleson in his book Value Averaging The Safe and Easy Strategy For Higher Investment Returns. Professor Paul S. Marshall who published his findings in Journal of Financial And Strategic Decision, also gives weight to the usefulness of this formula-based investing method.

The value averaging (VA) method performs better compare to dollar-cost averaging (DCA) because the average cost per unit is pushed down much more by using VA when the fund price is depressed. When the fund rises again, VA actually dictates that less high-priced units are purchased, thus keeping the average cost per unit as low as possible again. In this way, VA can extract higher return than using DCA. VA method also has a profit-taking signal when the preset profit target is achieved.