You will be able to explain why money needed soon should not sit in assets that can fall sharply.
A friend tells you she put her wedding savings into a fund two years before the date, because the bank account paid almost nothing. The market fell sharply eight months before the wedding. By the time the hotel's next deposit was due, her S$24,000 was worth about S$19,200, and she had to choose between selling at a loss or asking her parents for help. Funds rise and fall, so this one behaved normally; it just belonged to a goal with a much later date.
This lesson is about that mismatch. Where you keep a goal's money should depend mainly on one thing: when you need it.
Lesson 1.1 defined time horizon as the time between today and the date you need the money. It sounds like a calendar detail, but it decides how much risk a goal can take.
Investments such as shares and funds have higher expected returns than cash over long periods, and How money works lesson 5.1, Every place you put money trades risk, return and liquidity, explained why: you're paid for accepting that the value can fall. Those returns are expected, which is different from promised, and over any short stretch the value can go down instead, and sometimes a long way.
A drop in price is a paper loss until you sell. If you don't need the money for fifteen years, a bad year is unpleasant but usually survivable, because you have time to wait for prices to recover. Recoveries have taken anywhere from months to many years in the past, and nobody can tell you in advance which kind the next one will be.
If you need the money in eight months, a fall is a real loss. You have to sell at whatever the price is, because the hotel, the HDB payment or the car dealer will not wait.
The arithmetic also works against you after a fall. In the example above, the S$24,000 that dropped 20% to S$19,200 now needs to rise 25%, not 20%, just to get back to where it started. A smaller sum has to grow by a larger percentage to recover the same dollars.
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, by themselves, are not the problem. That is why the same fund can be a sensible home for one goal and a poor one for another.
A practical way to sort goals is into three bands by horizon.
Under two years, the money needs to hold its value. Savings accounts, fixed deposits, Treasury bills and Singapore Savings Bonds are the usual candidates, and lesson 2.2 compares them. A wedding in 18 months or the cash you will pay when you book a flat belongs here.
Two to five years is the middle band. Most of this money should still sit in capital-stable places, because there may not be time to recover from a bad fall. For a goal at the far end of this band, some people invest a small part and accept that it might come back lower.
Over five years, a goal can accept price swings in exchange for a higher expected return, provided its date is flexible enough or far enough away to wait out a fall. A child's university fund that is sixteen years away is the clearest case. Lesson 2.3, When investing makes sense for a goal, and when it does not, covers how to decide.
Treat the bands as a starting point that you adjust. A goal with a date that can't move at all should be treated as shorter than it looks. A goal you could happily delay by two years can be treated as longer.
Goals don't stay in one band. A home downpayment six years away today will be two years away in four years' time, and by then its money should be sitting somewhere different.
The usual way is step by step. As a long goal comes within a few years of its date, you move part of its money from investments into cash-like places each year, so that by the last year or two it holds no money that could fall sharply. Doing it in steps means you aren't betting everything on the price on one particular day.
As an example with made-up figures, someone with S$30,000 invested for a goal five years away might decide to move S$10,000 into cash-like places in each of the last three years. When the final year starts, all of it is out of the market. The point is to decide the dates in advance and write them down, so the decision isn't made in a panic during a bad month.
Mei and Daniel's goals from lesson 1.4, Build your goals sheet, sort easily. The wedding is 30 months away and the diploma 24, which puts both in the middle band and close to its short end. The home cash and the car are 60 months away, right at the line between the middle and long bands. With a fixed date for the flat, they treat the home money as middle band.
Look at your own goals sheet 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.
Group your goals into under two years, two to five years and over five years.
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