Thank you to everybody who participated in last night’s live Twitter Q&A about The 3% Signal @TheKellyLetter. The following is a recap of the interaction and some further details where I think they’ll help.
@cb12131 asked: “Starting #3Sig in a non-retirement accnt. Is it a bad idea to ignore sell signals for the 1st yr to avoid tax implications?”
I answered: “Don’t ignore sell signals for the first year. Just start the plan. You’ll have to deal with tax consequences eventually, anyway.”
@Axmear asked: “To help with the tax, can I use 2 accts with one sig3 plan? Use roth, stock holder, to sell, reg acct, bond holder, to buy?”
I answered: “Interesting thought! Could work. Be sure to track both as one account somewhere, maybe a spreadsheet, to get the right signal size.”
There is no doubt that the best place to run a 3Sig plan is a tax-advantaged account such as a 401(k), IRA, TSP, or TFSA (Canada). However, even people running it in a regular account can do pretty well by tracking which shares they sell to avoid short-term capital gains, and by the plan’s issuing a sell signal only when the market exceeds more than 3 percent growth in a quarter, which is fairly generous and keeps the frequency of selling manageable. The idea proposed by @Axmear (who, by the way, is Will Axmear of Axmear Family Farm fame) is a good alternative, too. For more on this topic, see “Tax Considerations” on page 168 of the book.
@QuatroWilson asked: “Jason, using closing prices what was the overall annual return from 2000 to mid 2013 using the 3% method (ball park)? Thanks”
I answered: Mark’s plan begun with $10K and adding $13,860 new cash became $237K by end 2013. http://jasonkelly.com/resources/strategies/”
On the same page, I’ll soon show three other competing plans using the same dollar amounts running beside Mark’s plan: dollar-cost averaging into SPY, IJR, and Morningstar medalist actively-managed funds. You’ll be able to follow along as the quarters go by to see how the plans hold up.
@sirnagpal asked: “Read your excellent book. I am in the UK and cannot find a good any good small cap and bond index fund. Advice?”
I answered: “I will create a tipsheet for Canadian, UK, and other foreign investors looking to run the plan in their countries.”
Emphasis on Canadian. I get dozens of emails per week from Canadian investors wanting Canada’s answer to IJR and BND.
@Larry_Rogers asked: “Had great February. $7K ahead before burned for $1500 loss w/ HPQ late — still have it. How do you approach earnings dates?”
I answered: “In #3Sig, they’re irrelevant. They just introduce another fluctuation pressure, and the plan uses all fluctuation.”
“Not necessary for #3Sig. Typical hit/miss with stocks, 50% mistake rate. Some reports send stocks up, others send them down.”
@sawlls asked: “And in general … curious to know what do you think of using leveraged ETFs with #3Sig?”
I answered: “Lev ETFs can work, but need new allocation target, growth target, and sometimes higher frequency. Not as reliable as base 3Sig.”
@CEO_72 asked: “I had thought while reading about leveraged funds. Think I saw that this is discussed with subscribers?”
I answered: “Yes! The letter runs base-case #3Sig in Tier 1, and uses lev ETFs in Tiers 2 and 3 of its portfolio.”
@TheHenriqueF asked: “At quarter end, the qty of an ETF you need to buy(or sell) is not an integral(eg 0.7).Should u round and buy 1 share?”
I answered: “Yes. Using whole share amounts is fine. See page 162 in the #3Sig book.”
@CEO_72 asked: “Hi Jason. For the bond fund, BLV vs BND? BLV offers better yield but fluctuates more. Prefer stability in bond fund?”
I answered: “BND. Avoid long-term bond funds in #3Sig. BND and BIV are best as evergreens in all interest rate environments.”
“For more on this, see page 86 in the #3Sig book.”
@chgopace_jd asked: “I like 3sig on my 401k to start. My 401 has only one small cap fund cost are over 6%. Would it be better to forget 401K?”
I answered: “6%! Are you sure? What’s the fund name/symbol?”
@chgopace_jd: “Empower, our company switches to them end of month, don’t give a tcker symbol.”
I: “Odd. What’s the cheapest stock fund in the plan, and what’s its expense ratio?”
@chgopace_jd: “My bad Jason 6.23 per $1000.00 for a 0.62%..I can do it on 401K.”
I: “That’s more like it, but still high. Try to get under 0.2%.”
@chgopace_jd: “OK, thank you, Large Company stock at 0.19%.”
I: “No problem with that. Good work finding it!”
@gustofson_troy asked: “Using VB for Tier 1. Easier to have dividends sweep into cash vs adding more shares? New shares add to cost basis.”
I answered: “VB is a good choice! I recommend directing all distributions and contributions to the bond fund first, then follow signals.”
@gustofson_troy: “Would be great if you could add total shares of each stock in Tier 3 to the letter. Would help in verification of 3% calcs.”
I: “Thanks for the tip. For now, you can see share quantities on the Tier 3 history page at http://jasonkelly.com/kellyletter/open/.”
@gustofson_troy: “Do you calculate 3% off desired price on limit orders or actual purchase price?”
I: “Desired – the one figured from the signal line. By always using desired prices, catch-ups auto happen in later quarters.”
@ksinghsalaria asked: “I have 20000 and want to start plan. So I put 1/4 money at each buy signal and if there is sell signal, I should sell too?”
I answered: “Yes. Add 1/4 of your cash to the next four buy signals, no matter how small. Follow sells as usual. http://jasonkelly.com/3sig/#comment-154533.”
@ksinghsalaria: “Once money is 401k can’t use it for anything else. If I use external account then Can’t put in 401k.”
I: “You can add cash to a 401(k) from outside. Limits are generous. So, keep bottom-buying outside 401(k). See sidebar p. 260.”
@phillyguy2010 asked: “Have you considered running 3 sig with multiple etfs and one common bond fund?”
I answered: “Yes, but it’s almost never worth the hassle except in short periods, and then getting the right mixture is z-val luck.”
@phillyguy2010: “Thanks. Is there any advantage to running 3 sig with a European small cap etf since European valuations are currently lower?”
I: “Maybe, but isn’t that a typical z-val guessing game? Keep 3Sig as 3Sig. Do other investing elsewhere, if at all.”
@Maggiescotts asked: “Results just as favorable if one does 4 percent 3 times a year verses 3 percent 4 times.”
I answered: “3%/qtr becomes 12.6%/yr, only 12.5%/yr at 4%/tri. Depends on time frame, etc. Easiest is to stick with quarterly plan.”
Thanks, again, everybody!
Look insideThe Kelly Letter
Yes, please issue Canadian recommendactions for 3Sig.
Hi Jason, I’m looking at starting you plan in Australia. We have the IJR fund available on the ASX but with current volatility in the AUD/US exchange rate, it may not be the best option?
Can you recommend any other Australian funds?
Consider Australia to be on the list of countries needing this info. Thanks for the tip, Alan.
Thanks for the book. I am looking forward to putting it into practice. Since I am retired, what are your thoughts on using this in a fund that I am living off of? Is there a way to set up regular withdrawals or should I set aside something separately for 3%?
You’re most welcome, Stephan.
You could run it in an account you’re living off of, abiding by Table 33 on p. 153 in the “Adjusting Your Bond Balance as You Grow Older” section. For withdrawals, you could take them from the bond fund after a sell signal pushes the bond allocation higher. If you’re five years into retirement, for instance, your target bond fund allocation would be 60% and you’d be rebalancing when it hits 65%. Instead of rebalancing, you could withdraw the excess bond balance to reset the target allocation at 40/60 stocks/bonds.
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