Set a written limit on your Singapore exposure and a currency policy for your shares and bonds.
Once you've settled how much Singapore to hold and whether to hedge currency, the choice tends to slip out of view. Twelve months on, you may not recall what you chose or the reasoning behind it. A strong year for the Singapore dollar, or a fund that suddenly looks cheap, can then tempt you to change course without noticing. A short written rule with its reason attached gives you something fixed to check any new idea against. Your index map from lesson 2.4 was drawn up before you made these decisions, so it has to be checked as well. Set aside about 20 minutes for the whole exercise.
Rule 1 is your limit on Singapore shares: the largest amount of Singapore stock you're prepared to hold, together with the reason you chose it. Measure it against your shares alone, since your whole portfolio is the wrong base for this rule. Count every way Singapore shares reach you: an STI fund, any individual SGX shares you own, and the small Singapore slice that sits inside a world fund.
Begin with your Singapore-linked share of wealth from lesson 5.1, "Home bias: holding too much of what you know". That figure adds up everything tied to Singapore: CPF, cash and your emergency fund, Singapore-dollar bonds, your home, your job, and the Singapore slice of a world fund. When the figure is high, a low limit makes more sense, because your job, CPF, cash and home are already exposed to Singapore. Setting the limit at zero beyond the world fund's own small Singapore slice is a sound answer. Holding more Singapore on purpose is also sound, provided your reason would still stand after three bad years for Singapore banks.
Grace (an invented learner whose figures are made up to show the method) finished lesson 5.1 with about 81% of her wealth Singapore-linked. She owns an STI fund and has told herself she won't add to it. Her Rule 1 caps Singapore shares at 15% of her shares. She wrote down two reasons: roughly 81% of what she owns is already linked to Singapore, and she would like some home exposure for the dividends.
Farhan (also invented, with made-up figures) rents a room and has no property. His Rule 1 allows Singapore shares only through the slice inside his world fund. His reason is that his job, CPF and cash already tie most of his wealth to Singapore.
Rule 2 covers currency for your shares: hedged, unhedged or a mix, with your reason. Lesson 5.2, "What currency moves do to your returns in SGD", found three things. Currency can swing a single year's result heavily, it partly cancels out across long periods, and it is minor compared with movements in share prices. Many long-term investors therefore keep their shares unhedged. Hedging a portion is also valid when you can name your reason, such as wanting a smoother ride, and you have checked how much the hedge costs.
Both Grace and Farhan went unhedged. Each wrote that single-year currency swings are acceptable to them and that they will not act on them.
Rule 3 carries the most weight, because with bonds a currency swing can be larger than the entire return. Bonds are the calm part of the portfolio, there to keep it stable, and shares supply the growth. The broad choices are:
Singapore-dollar bonds, which have no currency layer (you take on no extra exposure from holding assets in another currency) foreign bonds hedged to some currency foreign bonds left unhedged
For a hedged class, record the currency it hedges to and the currency risk still left. Work through the three questions from lesson 5.3, "Hedged share classes: when they help", to do this.
Farhan came away from lesson 5.3 with three candidate bond holdings written on a page and no choice made. The unhedged global bond fund would put several currencies into the calm part of his portfolio. The USD-hedged class would still carry US dollar risk, along with a hedging cost that moves as interest rate gaps change. The Singapore government bond fund has no currency layer but relies on one government's bonds, so it is a single issuer. He settled on the view that his bonds exist to give stability in Singapore dollars, and picked Singapore-dollar bonds. He accepted a single government issuer in exchange for stability in the currency he actually spends.
Picking Singapore-dollar bonds pushes your Singapore-linked total up, so work it out again and revisit Rule 1. Farhan's sum was S$21,000 in bonds, S$12,000 in his emergency fund, S$70,000 in CPF and the small Singapore slice of his world fund. That came to about S$103,000 of S$142,000, or about 73%. Given that figure, he left his share limit at the world fund's own Singapore slice. Rules 1 and 3 fit together this way, with Singapore holding the calm part and the wider world providing growth.
Lay your index map from lesson 2.4 next to the three rules. Take each line in turn and ask whether it breaks any rule, whether the combined Singapore weight in your shares across every route sits under your limit, and whether each bond line matches your currency choice.
Where a line breaks a rule, change it, and leave the old wording on the page with a line through it and the date beside it. That record lets you see later why the change happened. When the change means a different fund, add the new fund type to your comparison sheet from lesson 3.5 and give it the same comparison as the others.
Grace's map already has a Singapore government bond fund, which satisfies Rule 3. Her STI line is 15% of her shares, the exact limit, so Rule 1 holds with nothing to spare. She added a note that whenever the STI share drifts above 15%, new money goes to the world fund. Module 6 will turn her note into a proper rule.
Farhan's map contained the line "global government bond index, 35%, currency to be decided", which breaks his Rule 3. He struck it through, wrote the date next to it, and added a Singapore government bond index at the same 35%. His share line did not change. He then opened his lesson 3.5 comparison sheet and ran the same comparison on Singapore government bond funds.
Write one sentence for each rule, with its reason. Then write a fourth sentence saying what changed on your index map, or that nothing needed to change. When you finish, the map should obey all three rules, each changed line should still be on the page, crossed out and dated, and the comparison sheet should include any new fund the change called for.
Use plain language you could pick up in two years and still understand without the course notes next to you.
Write your home bias and currency rules in four sentences, then update your index map so it follows them.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).