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.

113 Comments

  1. Chaz
    Posted March 14, 2017 at 12:18 pm | Permalink

    Jason,

    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?

    Thanks again!
    Chaz

    • Posted March 17, 2017 at 7:27 pm | Permalink

      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,
      Jason

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