You will choose the indexes that fill each part of your target allocation and set their weights.
Grace has made her choice from lesson 2.3, One world fund or a set of building blocks: a world fund and an STI fund, no US fund. Farhan has made his: one all-world fund. Neither of them has yet written down what that means in numbers, and until they do, the next fund that looks exciting has nothing to be measured against.
This exercise produces an index map: a short table that lists each index in your plan, the share of your long-term portfolio it gets, and the country exposure all of them add up to. You fill in the index names now and the fund names in module 3. Figures below are made-up examples, including the country weights, which you will replace with numbers from real factsheets.
Take the one-line allocation you wrote in lesson 1.4, Draft your target allocation. Farhan's says 65% shares and 35% bonds on S$60,000 of long-term money. Grace's says 80% shares and 20% bonds.
Write those two numbers at the top of a page or a spreadsheet tab. Everything below has to add up to them. If you find yourself wanting to change the split while choosing indexes, stop and go back to module 1. The split comes from your horizon, need and nerve, not from which funds look appealing.
For the share part, write the index or indexes you chose in lesson 2.3 and the weight of each as a share of the whole portfolio. Farhan writes one line: an all-world index, 65%. Grace writes two: a developed world index, 60%, and the STI, 20%. That gives 80% in total, which matches her split.
For the bond part, write the kind of bond index you intend to use. Keep it to high-quality bonds, for the reasons in lesson 1.2. A global government bond index and a Singapore government bond index are two common types. Whether a foreign bond index should be currency-hedged is a decision for module 5, so for now write "currency to be decided" next to it if it holds foreign bonds. Farhan writes a global government bond index, 35%. Grace writes a Singapore government bond index, 20%.
Check that the weights add up to 100%. It sounds obvious, and it is the most common mistake in first drafts.
Now open the latest factsheet of each share index from its provider and copy the weights of the largest few countries. Then work out what each country adds up to across your whole share portion.
The method is one multiplication per fund. Multiply the index's weight in your portfolio by the country's weight in the index, then add up across indexes.
Farhan's case is simple. Suppose, as a made-up figure, the all-world factsheet shows the US at 62%. His US exposure is 65% times 62%, which is about 40% of his whole portfolio, or 62% of his shares. Japan at a made-up 5% of the index becomes about 3% of his portfolio.
Grace's case shows why the step matters. Measure her exposure as a share of her shares. Her developed fund is 75% of her shares and her STI fund 25%. Suppose her world index has the US at a made-up 60% and Singapore at a made-up 0.3%. Her US exposure is 75% times 60%, which is 45% of her shares. Her Singapore exposure is 75% times 0.3%, plus the full 25% from the STI fund, which comes to about 25.2% of her shares. The world fund adds almost nothing to Singapore. Nearly all of it comes from the STI fund.
Now set your comfort level. Decide the highest weight you are willing to have in any single country, and flag anything above it. For the US, many investors accept the market weight in a world index because it reflects the size of US markets; if you do, write that down as your reason. For any other country, a weight far above its market weight is a choice that needs a reason.
Grace sets a limit of 20% of her shares in Singapore and flags her 25.2%. She cuts the STI fund to 15% of her shares and raises the world fund to 85%, which brings Singapore to about 15.3%. Module 5 tests that limit again once she counts her CPF and her flat.
Look down the list and ask of each line whether your plan would still work without it. Two indexes that overlap heavily, such as a world index and a US index, are a sign that one line could go. Fewer funds mean fewer trades, fewer weights to rebalance and fewer chances to tinker. Farhan's map has two lines. Grace's has three. Both are short enough to run for decades.
A finished index map fits on half a page. It names each index, its weight, the country totals you worked out and any flag you raised, with the date of the factsheets you used. Yours goes into the activity box below.
Complete the index map for your allocation, listing each index, its weight and the combined country exposure.
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