Investing Strategies

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.

The 3% Signal

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:

  • Mark’s 3Sig: Mark’s plan run with IJR and VFIIX as shown in the book, beginning at the end of the fourth quarter of 2000 with $10,000 and the salary history shown in the book, then his salary increasing 3 percent annually in the years after 2013 (where tracking ends in the book). His quarterly contribution to VFIIX in 2013 was $1,815; in 2014, $1,871; in 2015, $1,927; and in 2016, $1,983. Mark also contributed $13,860 in new cash during the subprime mortgage crash, per the signal’s guidance. Notice the low expense ratios: IJR 0.14%, VFIIX 0.21%
  • DCA SPY: The same $10,000 invested at the end of 2000 and Mark’s same salary history shown in the book, with the same quarterly contributions after 2013. The only difference is that all capital goes into the S&P 500 as represented by the SPY ETF. This is dollar-cost averaging into SPY with Mark’s quarterly contributions. Mark’s $13,860 in new cash is distributed evenly across the first 50 quarterly contributions (Q101-Q213). Notice the low expense ratio here, too: SPY 0.09%
  • DCA Medalists: Same as DCA SPY, but using a portfolio of Morningstar medalist actively-managed funds, initially allocated as follows: 30% Longleaf Partners (LLPFX) large-company stock fund, 20% Wasatch Small-Cap Growth (WAAEX) small-company stock fund, 20% Artisan International (ARTIX) international stock fund, and 30% PIMCO Total Return (PTTDX) bond fund. All are featured in the book, and all are still highly-rated. Contributions are divided by the initial allocation percentages; holdings are not rebalanced back to target allocations. Notice the high expense ratios: LLPFX 0.92%, WAAEX 1.21%, ARTIX 1.17%, PTTDX 0.75%

Here’s how the three plans have performed, with all dividends reinvested:

Mark’s 3Sig DCA SPY DCA Medalists
End
2016
$332,091
25.2% in 2016
$263,874
15.7% in 2016
$209,070
7.3% in 2016
End
2015
$265,265
2.0% in 2015
$228,151
4.9% in 2015
$194,867
2.7% in 2015
End
2014
$260,023
9.9% in 2014
$217,530
17.8% in 2014
$200,329
7.1% in 2014
End
2013
$236,515
35.7% in 2013
$184,734
38.9% in 2013
$187,122
25.6% in 2013
End
2012
$174,282
19.6% in 2012
$133,015
23.7% in 2012
$148,965
23.1% in 2012
End
2011
$145,738
10.8% in 2011
$107,499
10.1% in 2011
$120,980
5.8% in 2011
End
2010
$131,574
37.8% in 2010
$97,642
25.5% in 2010
$114,395
23.8% in 2010
End
2009
$95,470
36.4% in 2009
$77,831
43.7% in 2009
$92,422
48.6% in 2009
End
2008
$69,993
5.5% in 2008
$54,147
28.8% in 2008
$62,194
26.5% in 2008
End
2007
$74,092
10.7% in 2007
$76,017
16.8% in 2007
$84,600
19.2% in 2007
End
2006
$66,957
24.4% in 2006
$65,069
31.7% in 2006
$70,991
28.9% in 2006
End
2005
$53,812
20.1% in 2005
$49,392
22.9% in 2005
$55,076
22.4% in 2005
End
2004
$44,809
37.3% in 2004
$40,183
34.6% in 2004
$44,984
30.7% in 2004
End
2003
$32,634
66.5% in 2003
$29,848
70.8% in 2003
$34,430
58.2% in 2003
End
2002
$19,604
20.9% in 2002
$17,476
17.8% in 2002
$21,762
26.4% in 2002
End
2001
$16,216
62.2% in 2001
$14,830
48.3% in 2001
$17,215
72.2% in 2001
End
2000
$10,000 $10,000 $10,000

To join others who are following the signal system in The Kelly Letter, please subscribe.

The Neatest Little Guide to Stock Market Investing

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):

The Dow
(DIA)
Page 124
The 3%
Signal
Page 119
Double
The Dow
Page 132
Maximum
Midcap
Page 136
End
2016
$23,472
13.5% in 2016
See
Above
$39,394
29.9% in 2016
$60,984
38.5% in 2016
End
2015
$20,677
2.2% in 2015
  $30,327
4.4% in 2015
$44,027
8.6% in 2015
End
2014
$21,139
7.6% in 2014
  $31,725
16.0% in 2014
$48,148
7.7% in 2014
End
2013
$19,649
29.7% in 2013
  $27,344
61.6% in 2013
$44,714
70.8% in 2013
End
2012
$15,156
4.7% in 2012
  $16,923
17.1% in 2012
$26,180
32.5% in 2012
End
2011
$14,481
5.4% in 2011
  $14,450
9.1% in 2011
$19,754
13.2% in 2011
End
2010
$13,741
11% in 2010
  $13,250
22% in 2010
$22,768
50% in 2010
End
2009
$12,368
19% in 2009
  $10,835
37% in 2009
$15,173
66% in 2009
End
2008
$10,401
34% in 2008
  $7,905
63% in 2008
$9,168
68% in 2008
End
2007
$15,752
6% in 2007
  $21,097
7% in 2007
$28,495
6% in 2007
End
2006
$14,805
17% in 2006
  $19,642
29% in 2006
$26,961
10% in 2006
End
2005
$12,710
1% in 2005
  $15,265
4% in 2005
$24,418
19% in 2005
End
2004
$12,776
3% in 2004
  $15,906
5% in 2004
$20,604
29% in 2004
End
2003
$12,427
24% in 2003
  $15,094
51% in 2003
$16,035
60% in 2003
End
2002
$10,000   $10,000 $10,000

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.

110 Comments

  1. Steven
    Posted June 28, 2016 at 7:44 pm | Permalink

    I’ve just finished reading The 3% Signal and I feel like I’ve emerged from the fog of trying to make sense of the clamoring, contradictory z-vals. Thank goodness I can now ignore all that noise! I’ve just become eligible to invest in my company’s 401k. I am happy to see a small cap index fund among the offerings. Which of these bond funds would be more suitable to run 3sig, VBTLX Total Bond Market Index or VBIRX Short Term Bond Index? Thank you for your great work!

    • Posted July 2, 2016 at 3:02 pm | Permalink

      Great, Steven!

      Yes, welcome to the better way to invest. Makes you wonder how so many millions can keep tuning into the general commentary, doesn’t it? I’m glad you found 3Sig.

      As for which bond fund: VBTLX. It’s cheaper, yields more, and offers a performance profile that works well with 3Sig’s quarterly moves. Your 401(k) and your future self will thank you for starting the plan.

      Wishing you well,
      Jason

  2. Elma
    Posted July 3, 2016 at 9:51 pm | Permalink

    Hi,
    I’ve read the 3%sig and was wondering which Bond ca be used in Germany?
    Thanks and all the best
    Elma

    • Posted July 13, 2016 at 12:18 pm | Permalink

      Hi Elma,

      Any low-expense medium-term or total market bond fund will work. If you provide the ones available in your account, including symbol and expense ratio, I can help you select the best one.

      Jason

      • elma
        Posted July 14, 2016 at 8:25 pm | Permalink

        Hi Jason,
        thanks for your advice.
        my broker offers me a lot of bonds. thats why its “so confusing” :)
        e.g.
        “ISHARES EURO CORPORATE BOND LARGE CAP UCITS ETF” – WKN:778928 (Total Expense Ratio* 0,20%)
        “ISHARES BARCLAYS CAPITAL EURO GOVERNMENT BOND 1-3″ – WKN:A0J205 (Total Expense Ratio* 0,20%)
        “Allianz Rentenfonds” – WKN:847140 (Total Expense Ratio* 1,01%)
        “DWS Euro Bond” – WKN: 972114 (Total Expense Ratio* 0,80%)
        just to name a view.

        Thanks a lot and best wishes,
        Elma
        Now

        • Alex
          Posted July 15, 2016 at 6:24 am | Permalink

          Hi Elma,

          I, for example, live in Germany, too, and I chose Schwab U.S. Small-Cap ETF (SCHA) and Vanguard Total Bond Market ETF (BND).
          They have both very little expense ratios (0.08% each) and are available at comdirect in my case.

          Best,

          Alex

          • elma
            Posted July 19, 2016 at 4:12 pm | Permalink

            Hi Alex,
            thanks a lot. i will check both of them. any reason you choose us small cap instead of a german index?

            elma

            • Alex
              Posted August 7, 2016 at 12:24 am | Permalink

              Hi Elma,

              I’ve chosen U.S. small-caps because I expect more of the U.S. market than of the German market over the long run.

              Jason, Elma, and everyone who wants to add their opinion:

              There are two U.S. small-cap ETFs with very low expense ratios.

              SCHA (Schwab US Small-Cap ETF)
              and
              VBR (Vanguard Small-Cap Value ETF)

              VBR sells at nearly twice as SCHA, but offers a dividen yield of 2.34% (VBR’s dividend yield) instead of 1.40% (SCHA’s dividend yield).

              Do you think it’s better, over time, to run 3Sig with the cheaper ETF (market price, not expense ratio, which is nearly the same) of which you can hold more pieces in your portfolio, or with the more expensive one, of which you can hold less pieces, but which pays higher dividends that could compound stronger over time?

              Best,

              Alex

  3. Hugo
    Posted September 25, 2016 at 6:33 am | Permalink

    Hi Jason Kelly,

    I’ve read your book and I’m happy that I did. It simplified what for me seemed complicate.
    I have however a variable that made me wonder if 3sig would still be the strongest strategy comparing to other possible strategies. My country does not have the equivalent to US-IRA or 401k accounts and taxes 28% from the gains (so each time I need to transfer balance either from IJR to VFIIX and vice-versa I would be taxed on the differences between the buy and sell costs of the shares).

    What strategy or what could be done in order to minimize these taxes?

    Thank you very much for your attention and I apologize if this question has already been answered before.

    Best regards,
    Hugo

    • Posted September 27, 2016 at 3:31 pm | Permalink

      I’m happy to hear from you, Hugo.

      The plan works best in a tax-advantaged account so that quarterly selling causes no tax consequences. However, it can still work in a taxable account.

      The best way to proceed is to keep track of the shares you bought and then sell ones held for more than a year to limit the tax bite to the long-term rate. I’m not sure if it works this same way in your country, but in the US the shares sold should be ones held for more than a year.

      Also, keep in mind that a plan receiving regular contributions of a decent size sells fairly rarely. The 3% quarterly growth target plus contributions sets a high enough bar that selling is infrequent and usually small in size. This, too, will limit the tax friction.

      I hope this helps, and thank you for the kind words.

      All my best,
      Jason

  4. Kevin
    Posted December 25, 2016 at 1:53 am | Permalink

    The book was a great read.The under-performance of DCA Medalists was eye opening.
    I was wondering why you chose DCA SPY as a point of comparison instead of using DCA IJR? Given the higher overall performance of IJR over SPY, it appears to me that DCA IJR could do even better than 3Sig.

    Kevin

    • Posted December 29, 2016 at 4:05 pm | Permalink

      Thank you, Kevin!

      I wanted to emphasize that the signal system handily beats the market benchmarks most people use. In some time frames, DCA IJR and lump-sum investing in IJR will beat 3Sig — if they are run perfectly, which they almost never are.

      Remember from the book that one of the most powerful features of the 3Sig plan is how it manages our emotions. Left to their own thinking, most investors bail out of DCA and lump-sum plans at the very bottom. In 3Sig, that won’t happen.

      Even when DCA and lump-sum investing are run perfectly in IJR, 3Sig beats them in most time frames.

      Thank you, again, and happy new year!

      Jason

  5. Matt
    Posted December 31, 2016 at 8:34 am | Permalink

    Happy Holidays Jason!

    Just finished reading your “Neatest Little Guide…” and “3% Signal” and am really looking forward to getting the new year started with the 3% signal plan for my 403B.

    As I’ve begun familiarizing myself with my options (I believe I’m going to select VSIAX – Vanguard Small Cap Value Index Adm and VBTLX Vanguard Total Bond Market Index Adm, respectively), I’ve noticed that rather than numbers of shares provided, everything is listed as “units.”

    I’ve looked into this online and realize why its units vs. shares, but my main thought has been, how does this affect my ability to use your spreadsheet and 3% plan? Should I separately track the share price and each quarter divide that into the dollar amount for each fund to approximate the number of shares I hold? Or can I use the “unit” value as a surrogate?

    I apologize if this question has been asked, but I’d greatly appreciate the insight. Thank you so much for all of your help.

    Thanks and Happy Holidays,

    Matt

    • Posted January 4, 2017 at 8:01 am | Permalink

      Happy new year, Matt, and congrats on starting out right with your own 3Sig plan!

      Trading in units instead of shares doesn’t affect how the plan works. Both are just numbers.

      The typical reason for a plan using units instead of shares is that the provider is charging an extra fee for an outside fund, something along the lines of 30 basis points is common. There might also be a wrap fee. Watch for a change in units owned when you make no contributions or transfers.

      If that starts happening, you’ll need to recalculate how many of the new units you would have owned at your last quarterly action in order to accurately generate the current quarterly signal. It’s an extra step, but not such a big deal.

      If you’re ever curious to know how much you’re being charged in wrap fees, if any, run the change in units * the unit price, multiply by 12, then divide the result by your balance. This will tell you the annual wrap fee. I’ve seen them as high as 0.75%.

      Go get ‘em,
      Jason

  6. Todd Johnson
    Posted January 30, 2017 at 10:46 am | Permalink

    Jason,

    I just finished your The 3% Signal, and for additional background I’m just about finished with Michael Edelson’s Value Averaging (2008 edition). I really appreciate the humor and clarity in your book. I found the “z-val” quotes and observations particularly relevant. While I find the spurious advice offered by some z-vals very bothersome, I think dislike even more the pompous, jargon-filled pronouncements about obscure market characteristics and measures that fill the general news cycle. As you noted in your book, “experts” pronounce, but then never suggest or report any reaction to the information, as if the general public is supposed to already be “in the know.”

    If you have time, I wondered if you clarity a few points for me regarding periodic contributions to a 3Sig plan, something I’m about to implement in a Fidelity 403b plan. I presume that I would buy half bonds and half stocks with my paycheck deduction in each of the first two months of the quarter. However, I’m a little unsure of the details of handling the third month’s contribution. It makes sense to me that I would wait to buy anything at quarter’s end until I calculate the signal line. If the signal indicates that I would buy stock, it makes sense to me that I would fund the purchase first with the third month’s contribution’s allotted “stock” half, then with the month’s “bond” half and finally, if needed, with sale of bond shares. If purchasing the requisite stock leaves any of the month’s contribution unspent, it would presumably go into the bond fund, unless it would put the bond fund over 30% of the total investment, in which case the remaining contribution would also go to buying stock. If the signal indicates standing pat, I would still need to invest the month’s stock half in stock to actually reach the signal line. If the signal indicates a stock sale, I would put the whole month’s contribution into bonds, selling stock only as necessary to bring me down to the signal line. However. on some occasions, the signal line could indicate a sale, but since the signal is calculated partially on the third month’s uncommitted funds, I might actually need to buy some stock to end up at the desired signal line. In short, a “sell” signal could occasionally actually mean “buy less.”

    I’d appreciate any clarification you can provide about all of that. Also, in case it’s of value to your other readers, the Fidelity mutual funds I will use are FSSVX (indexed to the Russell 2000) and FSITX (indexed to Barclay’s US Aggregate Bond Market). These have fees of, respectively, 0.05% and 0.07% and require a $10K minimum investment There are exact alternatives available from Fidelity with $2500 initial investments, but the fees are correspondingly higher. This family of funds were formerly marketed as “Spartan” funds, but Fidelity has recently dropped that in favor of just call theming “indexed funds.”

    • Posted February 3, 2017 at 3:03 pm | Permalink

      Todd,

      All contributions go to the bond fund, all the time, no exceptions. You do not divide the money between the funds on the way in. The calculator or spreadsheet will account for half of their value when figuring the signal line.

      This calculation gets around the issue you described. If adding half the value of the contributions puts the signal line above the current balance, then you would be directed to buy more of the stock fund, thereby putting your contributions to work.

      If you’re nervous about starting the plan now, I suggest beginning with a half-allocation to your stock fund, and awaiting a future buy signal for the other half. That helps manage the emotion, which is all you need to worry about. The plan will be fine even if you start it at a full allocation right at a market peak. Doesn’t matter. The later quarterly signals will work everything out.

      Here’s a tip: There’s always a reason to be nervous, and it’s why most people miss out on years’ worth of market gains. Crashes are rare, nowhere near as common as media pretends. However you need to do it, begin your plan.

      Happy sigging,
      Jason

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