Explain why money you need soon should not be in assets that can drop sharply in price.
A friend put her wedding savings of S$24,000 into a fund two years before the wedding date, because the bank account paid almost nothing (a story example). Eight months before the wedding the market fell sharply, and when the hotel's next deposit was due her money was worth about S$19,200. She had to choose between selling at a loss and asking her parents for help.
Funds rise and fall, and this one behaved normally. The problem was that she used it for a goal with a near date, when it suited a goal with a much later date. Where you keep a goal's money should depend mainly on one thing: when you need it.
Your time horizon is the time between today and the date you need the money. Lesson 1.1 defined it. It decides how much risk a goal can take.
How money works lesson 5.1, "Every place you put money trades risk, return and liquidity", explained why shares and funds have higher expected returns than cash over long periods. That higher return is payment for accepting that the value can fall. Expected returns are not promised returns. Over any short period the value can fall, sometimes by a lot.
A fall in price is only a paper loss until you sell. If your horizon is fifteen years, a bad year is unpleasant but usually survivable, because you have time to wait for prices to recover. In the past, recoveries have taken anywhere from months to many years, and nobody can know in advance how long the next one will take. If your horizon is eight months, a fall becomes a real loss, because you have to sell at whatever the price is then. A hotel deposit, an HDB payment or a car dealer will not wait.
After a fall, the maths also works against you, because a smaller sum needs a larger percentage gain to recover the same dollar amount. The friend's S$24,000 fell 20% to S$19,200. To get from S$19,200 back to S$24,000 it has to rise 25%, not 20%.
So the risk that matters for a goal is the chance that its money is down at the moment you need it. Daily ups and downs are not the problem on their own. For the same reason, one fund can be a sensible home for one goal and a poor one for another.
You can sort goals into three bands by horizon:
Under two years: the money needs to hold its value. Examples are a wedding in 18 months and the cash you pay when booking a flat. The usual options are savings accounts, fixed deposits, Treasury bills and Singapore Savings Bonds, and lesson 2.2 compares them. Two to five years, the middle band: most of the money should still be in capital-stable places, because there may not be time to recover from a big fall. For a goal at the far end of this band, some people invest a small part and accept that it may come back lower. Over five years: the goal can accept price swings for a higher expected return, as long as its date is flexible enough or far enough away to wait out a fall. The clearest example is a child's university fund sixteen years away.
Lesson 2.3, "When investing makes sense for a goal, and when it does not", covers how to decide whether to invest a goal's money at all.
The bands are a starting point that you adjust. Treat a goal whose date cannot move at all as shorter than it looks. If you could happily delay a goal by two years, you can treat it as longer.
Mei and Daniel, the couple from lesson 1.4, "Build your goals sheet", are an invented example of this. Their wedding is 30 months away and the diploma is 24 months away, so both sit in the middle band, near its short end. Their home cash and car are 60 months away, right on the line between the middle and long bands. Because the flat date is fixed, they treat the home money as middle band.
Placing any goal takes four steps. Count the months left until its date. Consider how fixed that date is. Place the goal in a band. Then adjust it: shorter if the date cannot move, longer if you could happily delay it.
Goals move between bands as time passes, so their money should move too. A home downpayment six years away today will be two years away in four years' time. Money that could reasonably sit in investments at the start needs to be in capital-stable places by then.
The usual method is to move the money step by step over several years instead of in one go. Moving in steps means you are not betting everything on the price on one particular day. Say you have S$30,000 invested for a goal five years away. You could move S$10,000 into cash-like places in each of the last three years, so all of it is out of the market when the final year starts. By the last year or two before the date, the goal should hold no money that could fall sharply.
Decide the dates for moving money in advance and write them down, so you are not making the decision in a panic during a bad month. Then, as each long goal comes within a few years of its date, move part of its money from investments into cash-like places each year on the dates you wrote down.
Look at your own goals sheet from lesson 1.4 with the same eye. For each goal, count the months left and think about how fixed the date is, then place it in a band.
Sort your goals into three groups: under two years, two to five years, and over five years.
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