Tell short-term price swings apart from permanent loss, and link each to when you need the money.
Two colleagues open their investing apps on the same bad morning. They see the same fund down 25% from its high (an illustrative figure). One shrugs and closes the app. The other feels sick, because that money is meant for a renovation starting in March.
People often describe risk as how much a price jumps around, but that is only part of it. The part that hurts is what the price is doing on the day you need the money. These two colleagues hold the same fund and saw the same drop. Only one of them is in trouble, and the reason is when each of them needs the money. The first colleague doesn't need it soon, so the drop changes nothing today.
The second colleague planned S$30,000 for March, a made-up figure. If the fund is still down 25% then, she has S$22,500. None of her options were in the plan: she can cut the renovation, borrow the S$7,500 gap, or delay the work.
Volatility is how much a price moves up and down over time. A savings account balance barely moves. A broad share fund can rise or fall by a fifth or more within a year, and a single company's share can move even more than that. You can see volatility every day, which is why it gets most of the attention.
Permanent loss is money that does not come back. A company goes bust and its shares become worthless. A scheme collapses and the operators disappear. Or you sell a holding at a low price and spend the cash, so you no longer own it when the price recovers.
A price drop is not the same as a permanent loss. Say Daniel puts S$20,000 into a fund that tracks a broad share market. In a bad year it falls 30%, and the holding shows S$14,000, which is S$6,000 less than he put in. If he keeps holding and the market recovers, the S$6,000 was a paper loss. That's a fall in value he never locked in, and it came and went. If he sells at S$14,000, the S$6,000 becomes a real loss. If the fund had held one company that failed, part of the S$6,000 might never come back.
Broad markets have recovered from past falls. How long each recovery took has varied a great deal, and nothing guarantees the next recovery will be quick.
A paper loss becomes a real loss only when you sell. That means a drop matters most if you are forced to sell at that moment. People rarely choose to sell at the bottom. Events force them to: a bill arrives, they lose a job and need to cover rent, or the deposit on a flat falls due. The price on the day of sale decides what they walk away with.
So a better question to ask about any holding is this: what is the chance I will have to sell this when the price is down, and how bad would that be? For money you can leave alone through a bad patch, a fall is uncomfortable but survivable. For money with a fixed date attached, the same fall can wreck a plan.
Your time horizon is how long until you need the money. It changes how risky the same holding is for you in particular. Money you need within a few years carries more practical risk in a volatile asset, because a fall may not have time to recover before the date. Money you won't touch for decades can live through a fall in year three and still have many years to recover before you need it, though no one can promise that recovery.
This is why the same fund can be a reasonable place for retirement savings and a poor place for a wedding budget. The fund doesn't change between the two cases. Only the timing does.
Price swings are the risk people notice. Three quieter risks also do damage:
Concentration risk is having too much in one company, one sector, one property or one institution. If that one thing fails, nothing else softens the blow. An employee who holds a lot of shares in their employer can lose their job and their savings at the same time. Inflation risk is the loss of buying power that comes from holding money for years at a rate below inflation. The loss happens steadily but never shows as a fall on screen, which is why people ignore it. Lesson 4.2, "Real return is roughly the nominal return minus inflation", shows how this works. Institution failure is when the bank, insurer, broker or app holding your money fails. SDIC deposit insurance protects certain deposits up to a limit. Lesson 1.3, "What SDIC deposit insurance covers and what it does not", sets out which deposits are protected and up to what limit. Money outside SDIC protection depends on the firm and on how your money is held.
Lesson 5.1, "Every place you put money trades risk, return and liquidity", introduced the risk, return and liquidity triangle. Even the safest-looking option on that triangle carries at least one of these quieter risks. For example, cash avoids price swings but takes on inflation risk in exchange.
For any pot of money, start with two questions: when do you need it, and what happens if it is worth less on that day? Then ask how likely you are to be forced to sell while the price is down, and how bad that would be if it happened. A goal with a fixed date and no room to slip, like the renovation in March, deserves a different home from a goal that can wait.
Start with your own goals. Write each one down with a date and a rough sum. The date is what turns a price drop from a number on a screen into a problem you can size. Once every pot has a date and a sum, you can match each one to a suitable place to hold it.
Take three of your goals. For each, write when you need the money and what would happen if it were worth 20% less on that date.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).