You will be able to set a position size by asking what happens if the asset goes to zero.
Back in module 1, Darren had S$2,000 he was curious about putting into bitcoin. Since then he has learned how it works, checked an exchange, made a custody plan and read about the firms that failed in 2022. One question is still open, and it is the one that decides how much any of this can hurt him: how much should he put in? Most people answer it by thinking about what they might make. This lesson answers it the other way round.
When you are excited about an asset, you picture it rising. A friend doubled their money, a chart points up, and the question in your head becomes how much you would make if it did the same for you. That question has no reliable answer, and it pushes you towards putting in more.
Turn it around. Imagine the asset goes to zero, or close to it, and stays there for years. Terra did, in lesson 5.1, Terra and Luna: a peg held up by an algorithm. Many tokens have. Bitcoin has fallen by more than half from a peak several times, as you saw in lesson 1.3, What gives bitcoin a price, and why it swings. Now ask: how much could I lose completely without changing any plan in my life? Not without feeling annoyed, but without delaying a home purchase, cutting what you save for retirement, borrowing, or losing sleep for months.
That amount is your ceiling, and for most people it comes out smaller than the figure they had in mind before they asked.
The loss you can absorb depends on what sits underneath it. Lesson 1.1 of The Singapore personal finance system, Why the order you set things up matters more than the products, set out the order: protection, an emergency fund, clearing expensive debt, then investing. Speculative assets sit on top of all of that, never in place of it.
So before you size any speculative position, check three things. Is your emergency fund in place, at the size lesson 3.1 of that course, How big your emergency fund should be, helped you set? Have you cleared expensive debt, such as a credit card balance? And are you already investing regularly in your core portfolio? If any of those is missing, the honest position size for a speculative asset is zero for now, however small the amount.
Darren checks his. His emergency fund covers six months of spending and sits in a separate savings account. He has no card debt. He invests every month into a world equity ETF. His foundations are in place.
Your cap should be written both as a dollar figure and as a percentage of your investable assets. For this course, investable assets means money you have invested or could invest for the long term. It excludes your emergency fund, money set aside for a goal in the next few years, and CPF savings you cannot freely invest.
Here is Darren's worked example, with made-up figures. His investable assets come to S$60,000. Asked what he could lose entirely without changing any plan, he settles on S$3,000. As a share of investable assets, that is S$3,000 divided by S$60,000, or 5%.
Why both forms? The dollar figure is what you feel, and it keeps the loss concrete. The percentage keeps the cap in proportion as your wealth changes. If Darren's investable assets grow to S$100,000 in a few years, 5% would allow S$5,000. If he wants to keep the cap at S$3,000 in dollars instead, he can say so in his policy. Either choice is fine, as long as it is written down.
One cap covers every speculative and alternative asset you hold, added together. If Darren also bought into a fractional watch platform, that money would come out of the same S$3,000.
Here is the hardest part. Suppose bitcoin doubles and Darren's S$3,000 becomes S$6,000. His friends are talking about it again, and the S$3,000 cap now feels timid. He will be tempted to add more, at a higher price, just when the asset is most talked about. Many people put their largest sums in near a peak for exactly this reason.
The same pull works in reverse after a fall. With the position down to S$1,200, buying more "while it is cheap" feels clever, and the cap feels like it should stretch.
Few people reason well in either of those moments, so make the decisions now: whether you will ever add after a large rise, and whether a fall lets you top up, and by how much. Lesson 8.2, Rebalancing and exit rules, written before you need them, turns these decisions into rules. For now, the job is to name your number while you are calm. Think about your own life plans, and then write down the sum you could lose in full without changing any of them.
Write the dollar amount you could lose entirely without changing any plan, and convert it into a share of your investable assets.
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