Write a risk rulebook and test a portfolio of up to 15 positions against it.
Marcus spent module 11 writing rules for his portfolio one at a time: a sizing method, a Kelly ceiling, limits, a cluster cap, a thesis for each stock, a stress rule and a currency policy. Spread across seven lessons, those rules are only notes. Gathered on one page, with a stress test beside them and a record of what they forced, they become a rulebook, something you can run money by.
You'll build two things: the rules page, and a stress test tab that checks your portfolio against it. Allow about forty-five minutes. You need your holdings with their values in SGD, the limits and theses you drafted in Lessons 11.1 to 11.7, and proxy index data for the stress test. The rulebook is meant for a portfolio of up to 15 positions, which is about as many as one person can keep a written thesis on.
The page has five short sections: sizing, limits, review rules, stress rule and currency policy. Each rule is one or two sentences, and each one says what happens when it is broken.
Sizing draws on two lessons. Your sizing method comes from Lesson 11.1, Position sizing: equal, conviction and volatility weights, and your ceiling comes from Lesson 11.2, The Kelly criterion and why professionals use a fraction of it. Marcus wrote that single stocks are equal weighted at 5% of the portfolio (all of his figures are made-up results for teaching), or 4% if volatility is above 30%, and never above a quarter of the Kelly fraction on his own estimate of edge.
Limits come from Lesson 11.3, Position and sector limits, and concentration risk: a single stock limit, a sector limit counted through funds, and a country limit. Add the cluster cap from Lesson 11.5, Correlation clusters: hidden bets across your holdings. A cluster cap is a limit on any group of holdings sharing one driver. Marcus's limits section says he trims any stock more than one point over its target, holds no sector above 15% counted through funds, keeps Singapore shares to no more than 25%, and caps any group sharing one driver at 20%, except core world equity and bonds.
The review section comes from Lesson 11.4, Thesis review instead of price stops. It holds a thesis for each holding, the evidence that would trigger a sale, and the events that trigger a review. Marcus keeps a written thesis for every stock with two or three sell signals each. He reviews it at every results announcement, every management or auditor change, and every debt event. A price fall prompts him to reread the thesis and never leads to a sale on its own.
The stress rule is the most you will accept losing in any scenario, written both in SGD and as a percentage. Marcus's says no scenario may cost more than 40% of the portfolio.
Currency policy comes from Lesson 11.7, Currency risk and when hedging earns its cost. Marcus leaves his shares unhedged, keeps bonds and cash in SGD or hedged to SGD, and checks the hedge cost once a year.
Leave space at the bottom of the page for a sixth section, rebalancing, which you add in Lesson 12.2, Rebalance a mix of ETFs and single stocks to a written rule. How much of the portfolio sits in shares is a decision for your investment policy, so it stays off this page.
Make a check table with one row per rule and three columns: the limit, today's figure, and pass or breach. If a figure sits exactly at a limit, record it as "on the limit" and leave it out of the breaches.
Marcus found semiconductors exactly at his 15% sector limit, so he marked that row on the limit. He also found four breaches:
His bank stock at 7.9% against a 5% target. His chip designer at 7.4% against a 4% target. Singapore shares at about 27.7% against the 25% country limit. A cluster driven by Singapore rates and regional growth (the bank, his STI ETF and an S-REIT) at about 23.8% against the 20% cluster cap.
If every rule passes on your first try, look again at whether your limits are tight enough to have ever bitten. A rule that never binds only describes the portfolio you already hold.
Add a spreadsheet tab named Stress. Give it one row per holding, with the holding's value in SGD, the proxy index you are using for it, and a column for each scenario. Following Lesson 11.6, Stress test against past crises and made-up shocks, use two historical periods and one shock of your own design.
In each scenario column, record the proxy's loss and the holding's loss in SGD. Total each column in SGD and as a percentage of the portfolio, then put your stress rule beside the totals so you can see which scenarios pass.
Marcus's 2008-style crisis cost about S$81,150, or 40.2%, which breaks his 40% rule. His 2020-style crash cost about S$50,000, or 24.8%, and passed. His own shock, with rates up and shares down, cost about S$37,400, or 18.5%, and also passed. In that shock his bond fund lost about S$3,900 at the same time as his shares fell. When rates rise and shares drop together, a bond fund can lose alongside shares and give you no cushion.
Keep a dated change record. Each entry names the rule that forced the change, says what changes, and says what the stress test shows after the change.
Marcus's entry trims the bank to S$10,100 by selling about S$5,900, the chip designer to S$8,080 by selling about S$6,920, and the S-REIT to S$10,100 by selling about S$1,900. The total raised is S$14,720 (5,900 + 6,920 + 1,900 = 14,720), and it goes into the world ETF.
After the changes, rerun both the check table and the Stress tab. On Marcus's rerun, the cluster came to about 19.9%, Singapore shares to about 23.9%, and semiconductors to about 12.1% counted through funds, so every limit passed. The 2008-style loss came to about S$79,200, or 39.2%, just inside his stress rule. His changes barely moved the crisis loss, because most of that loss comes from his 80% share allocation, and that is an investment policy decision outside the rules page.
Note any open questions for your yearly review. Marcus noted whether part of his bond fund should move to shorter duration, since his rates shock hits bonds and shares together.
Marcus has not traded yet. Recording a change is a separate step from trading, and his trades will go through the rebalancing rule he writes in Lesson 12.2.
Now write your own page, run the Stress tab on your portfolio, and record what it forces.
Write a one-page risk rulebook, run the stress test tab on your portfolio, and write down each change the results forced you to make.
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