You will write a target allocation for your long-term portfolio with a dollar figure for the worst year you are planning for.
Farhan has his three answers from lesson 1.3, Set your split from horizon, need and nerve. Horizon allows almost anything for his retirement money, need points to 60 to 80% in shares, and nerve says about 65%. He also has a world equity ETF worth S$52,000, a savings account with S$20,000 in it and a CPF statement in a drawer. Three numbers and three accounts do not yet make a plan.
This exercise turns them into one line you can act on. It takes about 25 minutes, and the figures below are Farhan's made-up ones, so swap in your own as you go.
List every pot of money you have and give each one a date: the year you expect to spend it, or "none" if it is for the long run. Anything with a date within about five years comes out of the long-term portfolio now. Your emergency fund comes out too, because its date could be next month.
That money belongs in deposits, T-bills or high-quality bonds matched to its date. The course Bonds, T-bills, SSBs and fixed deposits covers how to hold it. It does not count towards the share and bond split you are about to set, because its job is different.
Farhan's list is short. His S$20,000 in savings splits into S$12,000 of emergency fund, which stays in cash, and S$8,000 he had simply never decided about. He has no other goal before retirement. So his long-term money is the S$52,000 ETF plus that S$8,000, which makes S$60,000.
Leave your CPF savings to one side for now. They earn CPF interest and have their own rules, and module 7 shows how to bring CPF and SRS into one view with the rest.
Take the lowest of your three answers from lesson 1.3 and turn it into a round split of shares and bonds. Round numbers such as 60/40 or 70/30 are easier to remember and to rebalance towards. If the lowest answer is a range, pick the bottom of it unless you have a written reason to go higher.
Farhan's nerve figure was about 65%. He writes 65% shares and 35% bonds. On S$60,000 that is S$39,000 in shares and S$21,000 in bonds. Today he holds S$52,000 in shares and S$8,000 in cash, so he is well above his target in shares. He does not sell anything yet. Module 6 shows how to move towards the target with new money first, which costs less.
This is the step most people skip, and it is the one that tests whether the split is real. Use a made-up bad year in which shares fall 30% and bonds are flat. Multiply your long-term money by your share percentage, then by 30%.
For Farhan: S$60,000 times 65% times 30% is S$11,700. His portfolio would show about S$48,300 at the low point. That is a 19.5% fall in the whole portfolio, and it sits just under the S$12,000 he said he could watch without selling.
Now stress it once more, because lesson 1.2, What shares, bonds and cash each do in a portfolio, warned that bonds can fall in the same year. If his bonds also dropped 5%, he would lose another S$1,050, for S$12,750 in total. That is a little over his limit. He has two honest options: drop to 60/40, which brings the same stressed loss down to S$12,000, or keep 65/35 and accept a worst case slightly beyond what he said. He keeps 65/35, and writes the S$12,750 down next to it so the bigger number is not a surprise later.
Look at your own figure. If it makes your stomach turn, lower the share percentage and recalculate until the dollar loss is one you could watch. A split you cannot hold is worse than a cautious one you can.
Your allocation is not finished until it fits on one line you could read aloud. Include the split, the money it covers and the dollar loss. Farhan's reads: "Long-term money of S$60,000: 65% shares, 35% bonds. In a bad year with shares down 30%, I expect to see about S$11,700 disappear on paper, and I will not sell."
You will see this line again in module 8, when it becomes the first entry in your investment policy statement. By then the dollar figure will be out of date, and updating it each year is part of the review.
Before you write your own, look back at how Farhan got here. Every choice he made traces to horizon, need or nerve, and to a dollar figure he checked twice. Your reasoning should trace back the same way, so that future you, reading it in a bad year, cannot tell yourself the split was picked at random.
Submit a one-page allocation draft with your target split, the made-up bad year loss in dollars, and three sentences explaining the choice.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).