You will be able to turn your time horizon, required growth and tolerance for falls into a target allocation.
Ask ten people at a CPF talk how much risk they should take and most will reach for their age. Subtract it from 100 or 110, they say, and that is your share of shares. It is a tidy rule, and it ignores almost everything that matters about you: when you need the money, how much growth your goal requires, and what you did the last time markets fell.
This lesson replaces the age rule with three questions. Each one points to a range for the share part of your allocation. You then take the lowest of the three, which is usually the one that protects you from yourself.
Start with the date. Money you will spend within about five years belongs mostly in lower-risk assets such as deposits, T-bills or high-quality bonds. A deep share fall can take longer than that to recover, and you do not want to sell at the bottom because the renovation contractor needs paying.
Money with a horizon of five to ten years can take some share risk, often up to about half, because there is time for a partial recovery. Money you will not touch for more than ten years, such as retirement savings in your thirties, can hold as many shares as the other two questions allow. These bands are the course's starting points rather than rules, and you can shift them with a reason.
Notice that horizon belongs to the money, not to you. A 30-year-old saving for a wedding next year and for retirement has two horizons, and they get two different answers. Lesson 1.4 separates them properly.
Need asks a simple question: what yearly return gets you from where you are to where you want to be? You can work it out with the RATE function you met in How money works, lesson 3.4, Calculate the EIR of a flat rate offer with the RATE function.
Take Farhan from lesson 1.2. With made-up figures, he has S$60,000 of long-term money, adds S$12,000 a year, and wants S$500,000 in 20 years. In a spreadsheet, =RATE(20, -12000, -60000, 500000) returns about 4.2% a year. His own contributions add up to S$300,000, so the rest has to come from growth.
What does 4.2% tell him? Look up what lower-risk options pay today, for example T-bill and Singapore Government Securities yields on the MAS website. If your required return is at or below those, your goal does not need much share risk, and taking more is a gamble you do not have to make. If it sits well above them, you need a meaningful share allocation to have a reasonable chance. Need rarely gives a precise number. Its job is to stop you taking more risk than your goal calls for, and to warn you when a goal is out of reach at any sensible risk level, in which case the fix is a bigger savings rate or a later date.
Farhan's 4.2% sits above what safe assets paid when he checked, so need points him to a middle range, which he writes as 60 to 80% in shares.
Nerve is where most plans fail, so be honest. The best evidence is your own history. If you sold, stopped your monthly investing or stopped opening the app during a past fall, write that down. That behaviour is more reliable than any questionnaire.
If you have not lived through a big fall with real money, use dollars instead of percentages. People who say they can handle a 30% fall often mean they have never pictured what 30% of their own balance looks like. Ask yourself: what is the largest drop in dollars I could watch without selling? Then work backwards. With made-up figures, if your long-term money is S$60,000 and you plan for shares falling 30%, every 10% of shares you hold costs you S$1,800 in that bad year.
Farhan stopped buying for six months the last time markets fell hard. He decides the largest loss he could sit through is S$12,000. Dividing S$12,000 by S$18,000, the loss if all S$60,000 were in shares, gives about 67%, so nerve points him to roughly 65% in shares or less.
Farhan's three answers are horizon, up to 100% shares for retirement money; need, 60 to 80%; and nerve, about 65%. The lowest is nerve, so his target for the share part is about 65%.
The lowest usually wins because the cost of being too aggressive is far bigger than the cost of being slightly cautious. If you overshoot your nerve, you are likely to sell in the next crash and lock in the loss, which is the failure lesson 1.1 described. If you undershoot your need, you can still save more, work a little longer or adjust the goal. Those are uncomfortable, but you can recover from them.
There is one exception. If your nerve is far below your need, do not just accept the low figure and walk away. Treat it as a sign to work on both: raise your savings rate so you need less growth, and use the rules in module 8 to make falls easier to sit through.
Now it is your turn. Be strict with the nerve question in particular, because lesson 1.4 turns whichever answer comes out lowest into a target you will be held to.
Score yourself on horizon, need and nerve using the course worksheet and write the allocation each one suggests.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).