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; in 2016, $1,983; and in 2017, $2,043. Mark also contributed $13,860 in new cash during the subprime mortgage crash, per the signal’s guidance. Notice the low expense ratios: IJR 0.07%, 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 0.95%, WAAEX 1.30%, ARTIX 1.19%, PTTDX 0.80%

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

Mark’s 3Sig DCA SPY DCA Medalists
End
2017
$375,427
13.0% in 2017
$329,780
25.0% in 2017
$258,208
21.0% in 2017
End
2016
$332,091
25.2% in 2016
$263,874
15.7% in 2016
$213,424
9.5% 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.

15 Comments

  1. Kaleb Markey
    Posted January 5, 2018 at 12:23 am | Permalink

    How do you feel about BLV instead of BND for the bond side of the 3 sig plan?

    • Posted January 6, 2018 at 6:27 am | Permalink

      I prefer BND. If you want to use a different Vanguard bond ETF, go with BIV (intermediate-term). The purpose of the bond fund in my systems is to protect buying power capital while waiting to move it into the stock fund at opportune prices, with a little income as a secondary consideration. Total bond funds are best for this, with medium-term ones come in second-best. With others, you run too much rate risk.

  2. Graham
    Posted February 2, 2018 at 5:58 pm | Permalink

    I’m really enjoying your book The Neatest Little Guide to Stock Market Investing. It’s truly changed my life in my outlook towards investing and my returns have never been better. I’ve been listening to you online everywhere I am considering the 3Sig and I can’t wait to get to that book.

    In the meantime, I had a question about VB and SAA (as I’m comparing these two).

    From the top of October 2007 to the bottom of March 2009, VB lost almost 60%. Since SAA for instance moves at 2X, it lost about 50% more, basically lost about 87.50% in value. In case this type of pullback occurs, but let’s say if a recession eventually occurred that caused VB to lose 70%, what then would happen with SAA? Let’s say if it didn’t, it just only lost about 55%, what would happen to the likes of TNA. Do they liquidate these at that point? Honest curiosity…

    • Posted February 6, 2018 at 10:57 am | Permalink

      Thank you for the compliments, Graham!

      No, the leveraged funds don’t actually go all the way to zero, but in an extended pullback they would get very close to it. Because the fund returns are calculated daily, the only way for a 3x fund to go to zero (for instance) would be if its target index fell more than 33% in a single session. The market has never come close to that. It’s theoretically possible, but hard to imagine in our era of circuit breakers.

      So, they almost certainly won’t just blink out of existence. Instead, they would keep declining severely on a daily basis to an increasingly small fractional price, the way you can continue dividing a number by 2 forever without reaching zero. For all practical purposes on a balance, however, a leveraged fund would reach a value of nothing eventually.

      This is why the best way to handle them is with a timed buying reaction. My plans run quarterly, for example. In an extended sell-off, more capital is not moved in more frequently than quarterly, allowing the price to continue compressing (or rebounding, we can never know) before moving in more capital. This is not perfect, but pretty good and the best way I know of handling the wide price swings of leveraged funds.

      Jason

  3. Josh Schachter
    Posted March 11, 2018 at 12:55 pm | Permalink

    Hi Jason – I am 90 pages into your booking and loving it. I think I understand the methodology and want to start using it asap (it takes me a long time to finish books due to my work schedule).

    What is my first step? Is there a checklist that exists somewhere? I trust your method but it’s a bit daunting to withdraw from my mutual fund account I’ve been contributing to and accruing.
    Thank you.

    • Posted March 19, 2018 at 7:05 pm | Permalink

      Hi Josh,

      Just to note, I emailed you directly a week ago and you should be all set.

      I hope you enjoy the rest of the book!

      Jason

  4. Alex
    Posted March 13, 2018 at 5:53 am | Permalink

    Hi Jason,

    Of course I’ve been ready your book. One question popped to my mind. At the end of the chapter about your strategies you propose value averaging and Maximum Midcap.

    Both concepts make perfectly sense to me. However I was wondering if there is any good reason not to value average your the Maximum Midcap investment.

    I think the higher volatility requires more cash to keep the averaging strategy going. It’s also harder to come up with an respective 3% per quarter target. Is there anything I miss? What are your thoughts on this?

    Thank you so much, I highly appreciate your efforts.
    Alex

    • Posted March 19, 2018 at 7:03 pm | Permalink

      Hi Alex,

      Actually, there is such a strategy running in The Kelly Letter, called 6Sig, along with an even higher-powered one called 9Sig. The three Sig permutations work wonderfully together, each running just a stock fund for growth and a bond fund for safe storage of buying power. They are:

      3Sig
      1x small-cap fund and general bond fund

      6Sig
      2x mid-cap fund and general bond fund

      9Sig
      3x NDX fund and general bond fund

      The leverage introduced different base reset allocations and some rules for managing the greater volatility, but these are simple and do not interfere with the basic 3Sig plan explained in The 3% Signal.

      I’m glad my books are helping you!

      My best,
      Jason

  5. Vaqas
    Posted March 22, 2018 at 10:21 pm | Permalink

    Hi Jason

    How do you think a retiree proceed with signal investing? Should we reduce the movement percentage to allow investments from 9 sig to be converted to cash for use?

    • Posted April 18, 2018 at 11:38 am | Permalink

      Hi Vaqas,

      That’s one way. Another is to reduce the target allocation to stocks, as explained in The 3% Signal. The 9Sig plan produces so much volatility in the 3x stock fund that even a small allocation, such as 20%, can achieve meaningful growth. Many subscribers are running 9Sig at a base reset allocation below 60% stocks, which is what the letter runs.

      Jason

  6. Raja bilal
    Posted March 31, 2018 at 11:02 pm | Permalink

    Hi Jason,
    I’ve been reading your methodologies for investing, i’ve gone through just 900 pages and i feel investing right now. But i’m kinda confused how things will work out for me in a stock market like Pakistan.

    • Posted April 18, 2018 at 11:48 am | Permalink

      Hi Raja,

      The mathematics of investing work the same way anywhere, and my preferred strategies, the Sig system, rely on math alone.

      The PSX in Karachi lists 559 companies with a total market capitalization of about $85B. Any index funds tracking the whole PSX or a meaningful sub-group of it should be fine for the stock portion of your plan.

      Happy investing!

      Jason

  7. Dennis
    Posted May 19, 2018 at 10:07 pm | Permalink

    Hi Jason,
    I have been a Value Average investor since I bought your 2010 book in 2011. It helped me to retire early. I wanted to know if you had any thoughts regarding VA of Dividend ETFS like VYM, SCHD or DGRO? This would be for building future income from Dividends portfolio once I start withdrawing from my retirement in 10 years. At that point I want to only draw dividends .

    Thanks,
    Dennis

    • Posted May 22, 2018 at 11:17 pm | Permalink

      What great news, Dennis, and congratulations!

      There’s no reason you couldn’t value average a dividend ETF the same way 3Sig value averages small caps, but withdrawing only dividend proceeds would make the plan trickier.

      It’s probably best to value average quarterly for the next ten years, then hold in place since you’d be owning the fund(s) primarily for yield. It would enable you to focus on tracking your dividend flow only, and withdraw only from it, leaving the principal intact.

      I would still use the 3% quarterly growth goal during the VA years ahead.

      Jason

      • Dennis
        Posted May 24, 2018 at 3:11 pm | Permalink

        Thanks Jason! Also, when is your next book coming out? Keep ’em coming.

        Best Regards,
        Dennis

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