How to deploy your capital in a market correction

Following the interview with Peter Thornhill (Episode #11 of the Medical Money Podcast) I have come up with this loose formula. We discussed how our appetite for risk affects how we invest.

If you want to take advantage of the current (not recent- we don’t know if its over) then use the Sphincter Factor to identify how to enter the market.

Disclaimer- this is not financial advice, please seek professional advice before making any investment decision.

Background

Investing is more emotional than it is rational. Some people do not have the mental fortitude or stomach to see their portfolio through downturns. 

The Sphincter Factor gives a way of entering the market that is in line with your bowel control.

The Calculation 

Sphincter Factor (SP) has a score of 1-10

10 = I poo my pants when I see a spider

5 = I’m happy to watch “Saw” without closing my eyes

1 = I’m happy to skydive without a parachute

By using the SP you can take advantage of the correction in a way that keeps your underpants clean.

Using the SP

The SP identifies how many tranches (parcels) you will enter the market in. Each entry done quarterly.

Number of tranches = SP

Let’s use an example. 

Say you have $100,000 that you want to deploy into the market because you think it’s undervalued.

You have an SP of 5- you’re not bold but neither are you fearful.

This means you would enter the market in 5 tranches. ie $20,000 invested at quarterly intervals over the next 5 quarters.

Investors with a high SP are prevented from seeing a single purchase tank while those with a low SP can enjoy the rollercoaster ride and potential further falls.

What Do You Buy?

Listen to episode #11 to get some ideas but Peter’s recommendations are LICs.

Peter openly discloses that he holds Argo, AFIC, Milton and Whitefield.

See my dollar cost averaging post comparing these LICs to the popular index fund VAS.