This page shows the performance of investing strategies I recommend in The 3% Signal, and The Neatest Little Guide to Stock Market Investing, and The Kelly Letter.
Congratulations! You just found the stock market’s new best practice.
The 3% Signal plan (3Sig), explained briefly on page 119 of the 2013 edition of The Neatest Little Guide to Stock Market Investing, and thoroughly in my 2015 book The 3% Signal, achieves steady 3-percent quarterly growth in a small-company stock fund by skimming off excess quarterly profit into a safe fund that’s later used to make up shortfalls in weak quarters. This action, using the unperturbed clarity of prices alone, automates the investment masterstroke of buying low and selling high — with no z-val interference of any kind.
In Chapter 7 of The 3% Signal, readers follow three 401(k) investors at the same company, all earning the same salary and making the same monthly contributions to their plans. The only difference is what they do with their contributions. One of them, Mark, runs the signal plan and greatly outpaces his peers. Below are the annual returns of his plan, 3Sig, compared with dollar-cost averaging (DCA) his same contributions into two other investing plans.
Note that one of 3Sig’s primary benefits is the quarterly guidance it provides, which makes an investor more likely to stick with the plan through rough patches. DCA plans do not offer this, so most investors bail at the bottom. Also, because of high volatility that results from focusing an entire DCA plan on a single stock index fund as shown in the S&P 500 (SPY) plan below, almost all investors in the real world diversify their DCA plans across several different types of funds, most of which underperform the raw stock index represented here by SPY. Therefore, in the real world, 3Sig’s outperformance will be much higher than shown in the table below against a perfectly executed DCA plan using a raw stock index.
Finally, in Mark’s 3Sig, Mark skipped the call to add more cash in Q109, which crimped his performance. (See “March 2009″ on page 263 of The 3% Signal for the story.) Therefore, this plan does not show 3Sig’s maximum performance potential, which is realized only when all calls for new cash are met. I use it here nonetheless because I believe few people run any investment plan perfectly and that Mark’s decisions closely match what other people would have done in those extreme times. Even so, you can see his plan beating other plans which themselves achieve better performance than most portfolios assembled and managed by supposed pros.
In sum: The table below pits an imperfect 3Sig implementation against perfectly executed DCA plans — one of which is run at the highest performance allocation — and 3Sig still comes out ahead. It will do the same for you.
Here are the three plans explained:
Here’s how the three plans have performed, with all dividends reinvested:
To join others who are following the signal system in The Kelly Letter, please subscribe.
The 3% Signal, Double The Dow, and Maximum Midcap, the permanent portfolios from The Neatest Little Guide to Stock Market Investing, are proven winners. You saw the power of The 3% Signal above. Below, notice the power of Double The Dow and Maximum Midcap on a simple buy-and-hold basis. They perform even better when coupled with dollar-cost averaging, and better still when reactively rebalanced with modified permutations of The 3% Signal. Maximum Midcap is managed for you with the signal system in the Tier 2 section of the letter. In the table below, notice the impact of years like 2008 — and the opportunity they present to react intelligently by putting more money to work. The signal automates this process.
Please buy the book or subscribe to The Kelly Letter to see how the portfolios work.
Growth of $10,000 (dividends not included):
On page 187, I conclude the 15-year IBM Value Line example with this: “How about a real-life test? Decide now whether you would have held your position or sold it. Then, check IBM’s current price to see how you would have done. To help with your calculations, write down that IBM was $193 and the S&P 500 was 1,361 on February 17, 2012. Since then, which performed better?” Find out here.
Thanks for everything you do! I have read the 3% signal and think it’s great. However, I have a question about the leveraged system, 9 sig in particular. From some research that I have done it looks as though a triple leverage S&P 500 etf would out preform a small cap 3x leverage. Is this true? Lastly, any funds in particular that you prefer for 9 sig?
Thank you, Chaz.
Which 3x fund would do better depends entirely on the time frame. In most longer time frames, a small-cap fund will outperform the S&P 500, but for example in this year’s run-up the S&P and Dow have done better.
Keep in mind that 9Sig doesn’t use a small-cap index, it uses the Nasdaq 100, which is even more volatile, and the system thrives on the higher highs and lower lows of greater volatility. In some time frames, however, the Nasdaq 100 will also trail other indexes. With its focus on technology, for instance, its vulnerable to a sector sell-off, such as the dot-com crash of 2000.
All my best,
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