You will be able to write rules for trimming, adding and exiting a speculative position.
Picture two evenings. On the first, bitcoin has tripled in a year, your group chat is euphoric, and the position you bought feels too small. On the second, the exchange you use has just announced it is "temporarily" limiting withdrawals, and the forums are full of people saying it will be fine. Both evenings call for a decision, and on both you will be in the worst state of mind to make one. This lesson is about making those decisions now, while nothing is happening.
In lesson 8.1, Start from the loss you can afford, Darren set a cap of 5% of his investable assets, which was S$3,000 out of S$60,000 in his made-up example. Suppose he fills that cap: S$3,000 in speculative assets and S$57,000 everywhere else.
A cap on its own breaks the moment prices move. If his speculative holding triples to S$9,000 while everything else stays at S$57,000, his total is S$66,000 and the speculative share is about 13.6%, nearly three times his cap. He never chose to hold that much risk. The market chose it for him.
A rebalancing band fixes this. It sets a level above the cap at which you trim back. Darren picks 7%: whenever his speculative assets go above 7% of his investable assets, he sells enough to bring them back to 5%. Working it through, with the rest of his money unchanged at S$57,000, the trigger is reached when the speculative holding is worth about S$4,290, a rise of about 43% from S$3,000. In the tripled case, 5% of S$66,000 is S$3,300, so he would sell S$5,700 and move it into his core portfolio or savings.
Why trim at 7% and not at 5.1%? Selling every time the position wobbles would mean constant trading, fees and, in some cases, questions about tax that lesson 8.3, Tax and records for crypto and alternatives, covers. A band gives the position room to move, and only acts when the drift is large. The same idea is taught for a whole portfolio in lesson 6.2 of Build and run an ETF portfolio, Calendar or threshold rebalancing.
The band also stops you adding beyond your cap. When the position rises, you trim. You never buy more because it has gone up.
Falls need a rule too. Suppose Darren's S$3,000 falls 60%, to S$1,200. With the rest still at S$57,000, his speculative share is about 2.1%.
He has two reasonable choices. One is to leave it alone and let the position stay small, and simply accept the loss. The other is to allow a top-up back to the cap, but only at his yearly review and never mid-fall. In this example, 5% of S$58,200 is S$2,910, so a top-up would be S$1,710.
Neither is right for everyone, and the course does not tell you to buy more of anything. What matters is that the choice is made in advance, written down, and followed. Someone who has not decided will tend to buy more in a panic of excitement or sell everything in a panic of fear.
Price is not the only reason to get out, and often not the most important one. In module 5, the clearest warnings came from events at the firms, well before the price charts showed anything. So write exit rules tied to things that happen to the firm or the asset.
Good event-based exit rules are specific and checkable. For example: withdraw everything from an exchange if it loses its MAS licence or appears on the Investor Alert List; withdraw if a platform starts limiting or delaying withdrawals; sell a stablecoin if it trades below its peg for more than a day or its issuer stops publishing reserve reports; and exit any position if the reason you wrote down for holding it is no longer true. Many of these come straight from your red-flag checklist in lesson 5.4, Turn five collapses into your red-flag checklist.
Notice how these would have played out in 2022. A customer with a rule to withdraw at the first sign of withdrawal limits had a chance to act before a full freeze, as lesson 5.3, Celsius, Hodlnaut and Zipmex: yield from lending your coins, described.
Rules need reviewing, but at the right time. Set a fixed date once a year to look at your cap, your band, your exit rules and your holdings. That is when you can change a rule if your life has changed, for example after a new job, a marriage or a home purchase.
What you should not do is change the rules when prices are moving fast. A rule rewritten in a rush, upward after a rally or downward after a crash, stops protecting you, and the one-off exception is how most people end up holding far more than they meant to, or selling at the bottom.
Darren put his review date in his calendar for the first weekend of January. Choose one asset you hold, or might hold, and set its band and its exits while you are calm.
Write a rebalancing band and three event-based exit rules for one speculative asset you hold or might hold.
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