This page shows the performance of investment strategies I recommend in The Neatest Little Guide to Stock Market Investing and The Kelly Letter.
Value Averaging
Congratulations! You just found one of the best investment plans in existence.
My Value Averaging plan, explained on page 110 of The Neatest Little Guide to Stock Market Investing, achieves steady 3-percent quarterly growth from smallcap stocks while skimming off excess quarterly profit into a side cash account that’s later used to make up shortfalls in weak quarters. The end result is rock-solid 3-percent growth in the ETF we use, coupled with a side cash account that fluctuates in value as it grows bigger over time.
The plan is run for you in Tier 1 of The Kelly Letter, from which the following table shows our progress since the beginning of 2009, including growth of the cash balance from quarterly dividends:
Date |
Result of Quarterly Action |
1/9/12 |
Current Value: $443,538 Needed to: Sell Cash Flow: +$59,231 New Balance: Cash $123,904 | ETF $383,975 |
10/3/11 |
Current Value: $285,122 Needed to: Buy Cash Flow: -$86,194 New Balance: Cash $63,117 | ETF $371,316 |
7/11/11 |
Current Value: $351,722 Needed to: Buy Cash Flow: -$10,804 New Balance: Cash $148,400 | ETF $362,526 |
4/4/11 |
Current Value: $371,583 Needed to: Sell Cash Flow: +$19,623 New Balance: Cash $159,204 | ETF $351,960 |
1/10/11 |
Current Value: $383,880 Needed to: Sell Cash Flow: +$42,154 New Balance: Cash $139,581 | ETF $341,726 |
9/24/10 |
Current Value: $333,680 Need to: Sell Cash Flow: +$1,942 New Balance: Cash $97,427 | ETF $331,737 |
6/28/10 |
Current Value: $295,985 Needed to: Buy Cash Flow: -$26,071 New Balance: Cash $95,485 | ETF $322,056 |
3/29/10 |
Current Value: $325,260 Needed to: Sell Cash Flow: +$12,600 New Balance: Cash $121,556 | ETF $312,660 |
1/11/10 |
Current Value: $315,896 Needed to: Sell Cash Flow: +$12,320 New Balance: Cash $108,956 | ETF $303,576 |
9/28/09 |
Current Value: $336,020 Needed to: Sell Cash Flow: +$41,278 New Balance: Cash $96,636 | ETF $294,742 |
6/29/09 |
Current Value: $341,538 Needed to: Sell Cash Flow: +$55,358 New Balance: Cash $55,358 | ETF $286,180 |
3/30/09 |
Current Value: $222,847 Needed to: Buy Cash Flow: -$54,988 New Balance: Cash $0 | ETF $277,835 |
1/2/09 |
Current Value: $0 Needed to: Buy Cash Flow: -$269,756 New Balance: Cash $0 | ETF $269,756 |
From a capital base of $269,756 at the beginning of 2009, the plan required a purchase of $54,988 on 3/30/09 to maintain its 3-percent quarterly pace. From then on, however, it has never needed additional cash and has, in fact, kicked off $123,904 in extra cash while growing the ETF base at the locked-in 3-percent quarterly pace.
It may never require additional cash. At some point, we’ll need to decide whether it’s produced enough cash in its side account to justify moving some of it to other tiers of the letter where it can do more than earn nothing while waiting to buy on weakness. This reliable formula has turned $324,744 (the initial tracking period base plus one additional cash injection) into $507,879, with $123,904 as safe cash. Currently, 24 pct of the plan is in cash.
How did this happen? Glance over the history to see. The basic story is that the formula takes any profit beyond 3 percent per quarter out of the ETF and parks it in the safety of cash. When a quarter is weak, the plan redeploys some of that cash it’s built up to take advantage of the weakness and keep the balance in the ETF on the steady upward path of 3-percent growth per quarter.
For example, we bought on 6/28/09, a redeployment of $26,071 from what we’d skimmed off in prior quarters. Over the following three quarters, we sold three times to add a total of $63,719 back into our side cash account. Over all four quarters, our balance in the ETF grew at its steady 3-percent pace. In the table above, notice the relentless growth of the bold, blue balance in the ETF.
I believe that most casual investors need nothing more than this plan on their side. For all the energy we put into analyzing, charting, and fretting over what’s going to happen next in the market, this plan marches blithely upward through it all to an impressive destination. It’s running circles around most professional managers and its own creator in most quarters.
You can run the plan with any security, and you can run this flavor of the plan with ETFs that are free to trade at both Fidelity and Schwab.
The savings won’t be major, though. With just four trades per year, most trading commissions costing less than $10, and the expense ratios of this category of ETFs being cheap, however you choose to run the plan will be affordable. More important than how you do it is just that you do it, because this is one market approach that nobody should overlook.
To join others who are following this plan in The Kelly Letter, please get on the list.
Stock Market Investing
Value Averaging, 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 Value Averaging above. Below, notice the power of Double The Dow and Maximum Midcap when properly timed, an issue fully explained in the book. Maximum Midcap is timed for you in the Tier 2 section of the letter. In the table below, notice the importance of avoiding years like 2008 — and the rewards when you do so.
Please buy the book or subscribe to The Kelly Letter to see how the portfolios work.
Growth of $10,000:
| The Dow (DIA) Page 114 |
Value Averaging Page 110 |
Double The Dow Page 122 |
Maximum Midcap Page 126 |
|
| End 2011 |
$14,481 5.4% in 2011 |
See Above |
$14,4509.1% in 2011 |
$19,754 13.2% in 2011 |
| End 2010 |
$13,74111% in 2010 |
$13,25022% in 2010 |
$22,76850% in 2010 |
|
| End 2009 |
$12,36819% in 2009 |
$10,83537% in 2009 |
$15,17366% in 2009 |
|
| End 2008 |
$10,40134% in 2008 |
$7,90563% in 2008 |
$9,16868% in 2008 |
|
| End 2007 |
$15,7526% in 2007 |
$21,0977% in 2007 |
$28,4956% in 2007 |
|
| End 2006 |
$14,80517% in 2006 |
$19,64229% in 2006 |
$26,96110% in 2006 |
|
| End 2005 |
$12,7101% in 2005 |
$15,2654% in 2005 |
$24,41819% in 2005 |
|
| End 2004 |
$12,7763% in 2004 |
$15,9065% in 2004 |
$20,60429% in 2004 |
|
| End 2003 |
$12,42724% in 2003 |
$15,09451% in 2003 |
$16,03560% in 2003 |
|
| End 2002 |
$10,000 | $10,000 | $10,000 |
At the top of page 177, I conclude the ten-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 $93 and the S&P 500 was 839 on February 3, 2009. Since then, which performed better?” Find out here.
8 Comments
Jason-
Some very nuts and bolts questions regarding the VA plan.
1. Do you recommend doing this in tax sheltered (IRA/401k) plans first or other strategies there and this in a regular investment account?
2. Is there a timing aspect to this in terms of when to start? If so, how do you determine that?
3. Do you invest all that you can immediately? e.g. you have 300k to invest, put 300 in the first quarter, it goes down 10% (bad quarter!), you need 30k to fill-what do you do? What is an ideal reserve % to investment % in your opinion?
4. What ETF are you using in the above example?
Thanks and love the book and advice. Wish I had read it 13 years ago when I started investing…
Good questions, Mark.
Starting in tax-deferred accounts makes sense because many of them offer a limited menu of investment options and this plan works with just about any of the popular ones. That makes it a great way to get the most out of a limited menu. While I prefer using the plan with an ETF, a regular mutual fund also works. Once you see how well the plan works within your retirement accounts, you’ll probably use it in your regular accounts, too, at least with part of your capital.
For getting started, I suggest running the plan on paper until it issues a buy signal and then starting. This is what I usually advise subscribers to do each week in the letter. The waiting is hard, but almost always worth it. For example, those who waited in Q3 this year enjoyed a wonderful chance to buy in early October after the S&P 500 fell 19 pct from its July high. While the plan will work from any level, it’s psychologically more satisfying to see it produce profit from the get-go.
I would not invest all of your capital immediately because you’ll need buying power at the end of weak quarters early in the plan before it’s had time to kick off cash. For more on this point, I offer the following excerpt from the October 2, 2011 issue of The Kelly Letter:
As for which ETF, I show it in my book and letter. However, in all honesty, you can run the plan with any broad-based index ETF that sports a low expense ratio.
Thank you for the compliments, and good luck!
Thanks Jason, this helps a lot.
Thanks Jason-
One other point is about how you incorporate additional money into this model? For example, you start out with a 401k with 100k. Following the previous advice you purchase 50k at the best time as you can determine. You are doing your quarterly buy/sells. Over the next year, 16,500 flows into the account due to your continued contributions.
1. I assume that you’ve put these into your “cash” or “cash equivalent” portion, so that it is available for buying in if needed rather than DCA directly into the fund. Correct me if that’s incorrect.
2. If you have done as described and still have enough cash buffer, how do you plan to incorporate these additional funds? On “buy” times do you put in more than would be needed to take you up 3%? How much of your new cash would you put in? I had an idea that I could “save ” until there was a “buy” and then add what I had saved until that point. So if I had 4 quarters of selling and then a buy, I could incorporate the additional funds. If there were 2 buys in a row, the 2nd would only get the 1 quarter of input, but at least you are buying at relatively lower times.
3. If you did put more in in a given quarter, I would assume that you would update your “base” investment amount so that you would expect 3% on top of the new total and add/remove from that.
Is there any reason why you shouldn’t aim for more aggressive profits by using a figure greater than 3% for the quarterly increase in value? As I see it, this will require you to have more cash on hand to make up shortfalls if the market goes down, but the returns on investment will be greater if/when the market rebounds.
I’ve tried more aggressive figures, but 3 pct works out just about perfectly. It outpaces the market’s historical average by about 20 pct annually (20 pct better than the market’s long-term average, not a raw 20 pct return, of course) without signaling wild fluctuations in the cash account. It’s easy to try different targets on your own, though, and dial into the one that works best for your goals and temperament. I find 3 pct to be the sweet spot.
Jason, I’m wondering if you could double-check my numbers on modeling the Value Averaging strategy over the past 5 years. Assuming an initial investment of $10,000 in March 2007, when the S&P was at roughly the same level as it is now, what would be the current value of the account? By my calculation, the ETF would be worth ~$17,500, while the cash account would be worth ~$5,700. However, given the need for cash infusions totalling ~$11,900 throughout 2008 and into 2009, the average annual return would be only ~2.6%.
This study shows why you may have found 12% to be a sweet spot. They suggest goals between 10-12% to provide the best returns for the risk. Basically, they found that going over 12% increased the risks while not significantly increasing returns. Pretty interesting.
What a great study, Mark; one I hadn’t seen yet. Thank you for it. The results are so in-line with my own conclusions and supportive of what I’ve written that people are going to think I commissioned the work!