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.

117 Comments

  1. Mark
    Posted November 12, 2011 at 1:58 am | Permalink

    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…

    • Posted November 12, 2011 at 11:30 am | Permalink

      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:

      Which brings me to the number-one question I’ve received: How much of my cash should I devote to the plan? As an example, I’ll use a note I received from a new subscriber, a retired engineer who wants to put his IRA in the Tier 1 plan. He currently allocates 36 pct of his IRA to a bond fund and the remaining 64 pct to cash. He wants the account to be self-sustaining without any additional cash injections.

      There’s always judgment involved. For example, if he thinks the concerns over Europe and a US recession are overblown, maybe he’ll want to put 80 pct of his IRA into our ETF and keep just a 20-pct buffer for later buys. If he thinks we’re standing at a precipice but doesn’t want to miss out on all the gains if this turns out to be a bottom, maybe he’ll want to switch those percentages around and put 20 pct into our ETF and keep a full 80-pct buffer for later buys.

      I would suggest splitting the difference and going 50/50. If it’s a $200K IRA account, buy 1709 shares of our ETF at $58.50 and leave the rest in cash. That leaves plenty of firepower in the buying department, but also buys enough exposure to feel good about a 20-pct recovery in our ETF that would see the invested $100K turn into $120K.

      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!

      • Mark
        Posted November 15, 2011 at 4:39 am | Permalink

        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.

  2. M.F.
    Posted December 27, 2011 at 10:12 am | Permalink

    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.

    • Posted January 11, 2012 at 2:01 pm | Permalink

      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.

      • M.F.
        Posted April 17, 2012 at 8:09 am | Permalink

        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%.

  3. Mark
    Posted January 24, 2012 at 2:03 am | Permalink

    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.

    • Posted January 24, 2012 at 5:27 pm | Permalink

      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!

  4. Sam
    Posted May 29, 2012 at 5:38 am | Permalink

    Jason, I’m really enjoying your book. I also have the same question that Mark asked back in November, namely, how do you incorporate ADDITIONAL funds that you are accumulating through contributions to a 401k plan to this value averaging model? Let’s say I have $200/week withheld from my paycheck going into my 401k plan. Do I keep it in cash until there is a ‘buy’ signal generated to keep the account on pace for the 3% quarterly growth? In an up market it could be quite awhile before this cash gets used. If so, do I then deploy all of the contributions, and perhaps establish a new value path due to a potentially higher base? I’ll quit with the specifics, and allow you to comment basically on how to handle this cash flow that isn’t normally generated from a typical lump sum starting point. Thank you.

  5. David B
    Posted June 8, 2012 at 9:13 am | Permalink

    Hi Jason,

    I recently read your book and did a little bit of backtesting using your value averaging strategy. I started in 2007 with a midcap 400 fund up until date. Even through the brutal market the strategy still managed to take in a profit of about 11% whiles the average investor got destroyed. In the book you list a few technical indicators like MACD, RSI and SMA to help with market timing. If your opition do you think it is worth jumping in and out trying to time the market or just sitting tight and taking the ride ?

  6. Ryan K
    Posted August 13, 2012 at 10:21 am | Permalink

    Hello Jason,

    Just finished your book for the second time. The first time, maximum midcap looked like an ideal strategy for me; however, my investing style has changed to that of dividend investing. So I have a few questions:

    – Would value averaging be applicable to a single stock or portfolio of say five stocks? Setting goals for each of them to have 3% quarterly gains and supplementing the weak with the winnings from the strong.

    – What would you do when you receive a dividend in this scenario?

    – Would this work with a Dividend ETF? From my understanding most follow preferred stock and not common, not sure how that affects the strategy.

    – Finally, in your example are you keeping the cash in straight cash or would it be wise to maybe put it into a money market?

    Thank you very much for taking the time out to answer my complicated questions.

  7. Dan
    Posted November 14, 2012 at 4:15 am | Permalink

    Looks like Jason is neglecting his own blog.

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