12/13/2015 Constructive Panic

Mouse	XLE	-10.36%
Rabbit	Date	Return	Days
BT	8/11/2015	-3.48%	123
TM	8/12/2015	-4.14%	122
ED	9/17/2015	-3.30%	86
DY	10/30/2015	1.23%	43
CVS	11/6/2015	-6.33%	36
TMK	11/23/2015	-3.39%	19
WM	11/25/2015	-4.21%	17
CLF	11/30/2015	-9.91%	12
UPL	12/1/2015	-31.67%	11
APD	12/9/2015	-1.87%	3
Turtle	Date	Return	Days
BT	8/11/2015	-3.48%	123
TM	8/12/2015	-4.14%	122
MMP	9/4/2015	-13.48%	99
ED	9/17/2015	-3.30%	86
DY	10/30/2015	1.23%	43
CVS	11/6/2015	-6.33%	36
TMK	11/23/2015	-3.39%	19
WM	11/25/2015	-4.21%	17
CLF	11/30/2015	-9.91%	12
UPL	12/1/2015	-31.67%	11
	Since 5/31/2011	Annualized
S&P	49.60%	9.29%
Mouse	77.97%	13.56%
Rabbit	61.03%	11.08%
Turtle	60.81%	11.05%

CLF and UPL were purchased using the long term formula.

At some point the Rabbit will sell them and the Turtle will continue to hold. I’m taking turns on the short and long term purchases until the two models are completely separated from each other sometime in the next few quarters.

In the meantime, I’ll have some uneven performance on the short term Rabbit model that can’t be helped. These purchases should average out on that model to be both excessively good and bad, but annoyingly volatile in ways that the long term model is designed to ignore.

But the excessive volatility and general panic creeping into the market brings to mind the question of just what to do when panic strikes.

It all depends on what you are trying to accomplish with your investing. I’d like to retire without eating dog food. That’s my own goal.  I’m not trying to get rich quick or get poor slow.  I’m trying to use my work years to save for retirement in a strategic way.

The position of my own returns of based on a logarithmic forecast of my combined back-tested and live-tested return rates on the Sector Model (aka the “Mouse”):

The fact that it is slightly below the long term mean, translates into a slightly higher forward projection over the target period I’ve set for retirement. The day to day and month to month position of my account is measured relative to the long term regression projected forward.

I use that with another calculation to determine how much I want to have when I retire, how much I’m projected to have with my current balances and expected return rate, and how much of a difference that is from my target amount.

That difference tells me how much to put into my IRA each month.

This can be done with broad indexes and ETFs as well.  Calculate the long term regression, project it forward to the year you want to retire, and calculate the gap that you need to add each month to your IRA.

It will NOT be perfect, or exact, but it’s about as good as someone can do, and in times of bizarre market contraction and hidden volatility in specific sectors that isn’t reflected in the broad market averages, it’s a way to stay sane.

This week I suffered astonishing losses in my own personal accounts, and when I calculated how much I needed to save each month – it was LESS than the calculation last month. Based on long term regressions I was in better shape than I was before I had this bad week.

Psychologically I was in panic.

Mathematically I was peachy.

So what are my favorite Sector and Styles?  Energy and Global Small Caps. Scary as heck and even more profitable long term.

And what’s the best time? Now, always now. And the scarier “now” gets the better it is long term.

Demographically, 2018 should be the secular bottom – not as good (or terrifying) as 1982, but as good as we’ll ever see again.

“Great opportunities” come at times of panic. I expect the next few years to get scary. And if you are planning to retire one day, these are the best times to look in the worst places to invest.

What if you are planning to retire soon?  That’s an entirely different matter. Small Caps and Energy could destroy you.

That’s why you don’t make investment decisions from a blog. Blogs bring to light ideas that might be useful to your own goals, but the exact calculations are too great for any blog to deal with.

If you have a lot of money and plan to retire soon, volatility in scary sectors is the last thing you need.

If you don’t have a lot of money and / or you don’t plan to retire for a few decades, then volatility in scary sectors might be a great opportunity.

But only you can make that call, and once made, you have to see it through. Don’t double down on scary sectors and then change your mind by trying to time or use stop losses. Get squirrely and you’ll get run over.

Goals dictate target amounts and target dates.

Those targets dictate what kinds of investments to use and how much to save each month.

Since those goals won’t change quickly, neither should your strategy. And if you do make a lot of changes, then maybe you need to pull out a pen and paper and start writing down just what you are trying to do.

Either that, or start a blog to keep yourself honest…

Tim