Your allocation does more work than your fund choice

You will be able to explain why the split between asset types matters more than which ETF fills each part.

Most people who start investing spend their energy on the wrong question. They compare two world equity ETFs down to the second decimal place of the fee, read forum threads about which one is better, and then put whatever is left in their account into it without deciding how much should be in shares at all. The fund matters. The split between shares, bonds and cash matters far more.

That split is your asset allocation: the share of your portfolio you hold in each broad type of asset. A portfolio that is 80% in a world equity ETF and 20% in a bond ETF is an 80/20 allocation. Change it to 40/60 and you have built a different portfolio, even if the two funds stay exactly the same.

Here is why it carries so much weight. Use made-up figures for one bad year. Shares fall 30% and bonds are flat. The 80/20 portfolio falls about 24%. The 40/60 portfolio falls about 12%. On S$100,000, that is the difference between seeing S$76,000 and seeing S$88,000 on your screen. Now compare two world equity ETFs that track the same index but charge slightly different fees. In the same year, their results might differ by a fraction of one percent. Choosing between them is worth doing, but it is a rounding error next to the allocation decision.

The same logic runs in good years. The 80/20 portfolio will usually grow faster over long periods, because shares have historically earned more than bonds over long periods, in exchange for deeper falls along the way. There is no free choice here. A higher share allocation buys more expected growth with bigger drops. A lower one buys a smoother ride with less growth. Your job is to pick the point on that line you can actually live with.

That last part is where most plans break. On paper, almost everyone says they can handle a 30% fall. In practice, people sell near the bottom, and selling after a fall turns a temporary loss on paper into a permanent one. An allocation that is slightly too cautious but that you hold through a crash will usually leave you better off than an aggressive one you abandon halfway. So the right allocation is not the one with the highest expected return. It is the one with the highest return you will stick with.

Three things decide that point for you. The first is time: money you need in three years cannot recover from a deep fall, while money you will not touch for twenty years can. The second is need: how much growth your goals require, which you can work out from your savings rate and target. The third is nerve: how you behaved, or think you would behave, when markets fell hard. You will work through all three in lesson 1.3 and turn them into a number.

Notice what this does to the rest of the course. Once you know you want, say, 70% in shares and 30% in bonds, every later decision has a clear job. Choosing an index answers what kind of shares fill the 70%. Comparing ETFs answers which fund delivers that index at the lowest all-in cost. Rebalancing answers how you keep the split near 70/30 as markets move. The investment policy statement at the end writes it all down so that future you, in a panic or in a boom, follows the plan instead of the headlines.

If you skipped this step when you bought your first ETF, you are not alone, and nothing is lost. Most portfolios start as one fund bought on a recommendation. This course turns that starting point into a deliberate structure you can run for decades with a few hours of work a year.

Your task: write down what you hold today across every account, including CPF investments and SRS, and work out your current split between shares, bonds and cash as percentages. Then write the split you would choose if you were starting from zero today, and one sentence on why the two differ.

Work out your current split between shares, bonds and cash across every account, then write the split you would choose from scratch and why they differ.

Course

• Build and run an ETF portfolio