You will set a written limit for Singapore exposure and a currency policy for shares and bonds.
Farhan has three possible bond holdings on a page from lesson 5.3, Hedged share classes: when they help, and no decision. Grace has a Singapore-linked total of about 81% from lesson 5.1, Home bias: holding too much of what you know, and an STI holding she has promised herself not to raise. Both of them have done the thinking. Neither has turned it into a rule.
This exercise does that. You will write three short rules, check your index map from lesson 2.4 against them, and record in a fourth sentence what you changed. Allow about 20 minutes, and use the made-up figures below only as a guide to the method.
Write the maximum share of your shares, not your whole portfolio, that you will hold in Singapore stocks, and the reason. Count every route: an STI fund, individual SGX shares and the small Singapore slice inside any world fund.
Start from the Singapore-linked share of your wealth you worked out for lesson 5.1. The higher it is, the stronger the case for a low limit, because your job, CPF, cash and home already carry the Singapore risk. A limit of zero beyond the world fund's own small slice is a perfectly reasonable answer. So is a deliberate overweight, as long as the reason would survive three bad years for Singapore banks.
Grace writes: "Singapore shares: no more than 15% of my shares, because about 81% of my wealth is already Singapore-linked and I want some home exposure for dividends." Farhan, who rents a room and owns no property, writes: "Singapore shares: only the slice inside my world fund. My job, CPF and cash already tie most of my wealth to Singapore."
State your currency policy for the share part. Lesson 5.2, What currency moves do to your returns in SGD, showed that currency can dominate a single year for shares, but partly evens out over long periods and is small next to the swings in share prices themselves. Many long-term investors therefore leave shares unhedged. Hedging part of them is a valid choice if you have a reason, such as wanting a smoother ride, and have checked what it costs.
Both Farhan and Grace write: "Shares: unhedged. I accept currency swings in single years and will not react to them."
This is the rule that matters most, because bonds are where currency swings can be larger than the whole return. You have three broad options: bonds in Singapore dollars with no currency layer, foreign bonds hedged to some currency, or foreign bonds unhedged. If you choose a hedged class, write down which currency it hedges to and what currency risk remains for you, using the three questions from lesson 5.3.
Farhan weighs his page. The unhedged global fund exposes the calm part of his portfolio to several currencies. The USD-hedged class leaves him with US dollar risk and a hedging cost that changes with interest rate gaps. A Singapore government bond fund has no currency layer at all, at the cost of depending on one government's bonds. He decides stability in Singapore dollars is the job his bonds are there to do, and he writes: "Bonds: held in Singapore dollars, with no currency layer. I accept that they come from one issuer, a government, in exchange for stability in the currency I spend."
That choice raises his Singapore-linked total. With made-up figures, his S$21,000 of bonds, S$12,000 emergency fund, S$70,000 in CPF and the small Singapore slice of his world fund come to about S$103,000 of S$142,000, about 73%. He notes it, and keeps his share limit at the world fund's own slice because of it. The two rules work together: Singapore for the calm part, the world for growth.
Put your index map next to the three rules and go line by line. Does any line break a rule? Does the combined Singapore weight in your shares sit under your limit? Does every bond line match your currency choice?
Farhan's map from lesson 2.4 said "global government bond index, 35%, currency to be decided." That line now breaks Rule 3, so he replaces it with a Singapore government bond index at the same 35%. His share line is unchanged. He goes back to his comparison sheet from lesson 3.5 and runs the same comparison on Singapore government bond funds, because the fund for that line has changed.
Grace's map already holds a Singapore government bond fund, so Rule 3 is met. Her STI line sits at 15% of her shares, exactly her limit, so Rule 1 is met too, though only just. She adds a note that new money goes to the world fund whenever the STI share drifts above 15%, which module 6 will turn into a proper rule.
Four sentences: three rules with their reasons, and one saying what changed on your index map, or that nothing needed to. The map itself now obeys all three rules. If you changed a line, the old version stays crossed out on the page with the date, so you can see later why it changed. Then your comparison sheet gets any new fund the change requires.
Write the four sentences in plain language, the kind you could read in two years without needing this lesson to explain them.
Write your home bias and currency rules in four sentences and update your index map to match them.
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