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. Kat
    Posted January 14, 2016 at 2:32 pm | Permalink

    Hi again,
    I’m about a little over a third done with 3Sig and I started wondering how 3Sig worked with a Roth IRA. At some point, say a recession, wouldn’t you find that you need to contribute more than the contribution limit? What then….
    Thanks, Kat

    • Phil
      Posted January 31, 2016 at 10:08 am | Permalink

      The way I understand Jason’s advice for newcomers is to put your money into IJR over several quarters to make sure you don’t put everything in just before a downturn.

      Lets use an example of $6,000 of new money each year in your Roth IRA.

      On Jan 2 in Tier 1 you would start with $1,500 in IJR (assuming Jason gives newcomers the start signal,) and you put the balance of your cash ($4,500) into a bond fund. (This is the safe way that Jason talks about.)

      Over the next three quarters, depending on which direction IJR moves, you will either sell another $1,500 of bond to increase your stake in IJR, stand pat, or sell IJR and buy bond to maintain your 3% track. If IJR keeps going down (in your example a recession) you would sell another 25% of bond and buy IJR over each of the next three quarters. Come the next Jan 2, you would replenish your 25% bond and either add another 25% IJR or put the balance ($4,500) in bond.

  2. Kay Arms
    Posted March 28, 2016 at 4:05 am | Permalink

    I am 80 and have only $15000 +left in an IRA and have to keep some cash because of the RMD every year. What amount could I invest in both stock and bond indexes that will enable me to be able to buy enough through the bond index in a severe downturn, which I think is quite possible or even highly likely. Of course I can no longer add to my IRA. Maybe I just should run the 3Sig in other accounts. I have two other accounts at Fidelity that I could use but I would love to grow the IRA a bit.
    Kay

    • Posted April 29, 2016 at 7:56 am | Permalink

      Hi Kay,

      According to Table 33 in “Adjusting Your Bond Balance as You Grow Older” on page 153, the stock/bond allocation becomes 30/70 with a rebalance trigger at 75% bonds when you reach Retirement + 10 years. At Retirement +15 years, it becomes 20/80 with a rebalance trigger at 85% bonds.

      This would leave you amply positioned for buying into even a steep downturn, which you consider to be likely.

      I admire you for continuing to manage your investments wisely after retirement, and hope this helps!

      Best wishes,
      Jason

  3. Paul
    Posted April 2, 2016 at 7:59 am | Permalink

    Hi Jason,

    Been reading your stuff and following your plan for a while now. Was wondering, though, do you need to start with a minimum amount of cash for 3 sig to work well. It seems, with smaller amounts, it wouldn’t be worth the transaction costs.

    • Posted April 29, 2016 at 7:58 am | Permalink

      Hi Paul,

      Not really. I know plenty of beginning investors who started their plans with just $2,000 or so. With regular contributions and market growth, the balances grow pretty quickly and economies of scale kick in. It’s worth a little transactional friction in the early years just to acquire the habit of running the intelligent reaction every quarter.

      So, whatever you have to work with at the moment, 3Sig can handle! Good luck with it.

      Jason

  4. Alex Rodriguez
    Posted April 27, 2016 at 4:18 am | Permalink

    Hi,
    I’m finishing the neatest little guide to the stock market and I’m really interested in in investing in a Maximum midca fund/etf such as the UMPIX or MVV. That said, I’ve looked at the graphs for both and so far it’s been a nice bull run. Should I wait for the Bears? Or invest now and hope the bull run lasts?

    • Posted April 29, 2016 at 8:03 am | Permalink

      Hi Alex,

      It’s impossible for anybody to know, which is why I think the best way to use leveraged ETFs is in a smart signal plan such as 6Sig (instead of 3Sig, the original unleveraged version). I run 6Sig in The Kelly Letter. After the April 4 signal, which was to buy more shares of MVV, the bond balance was still an ample 32% of the portfolio, showing lots of buying power left, meaning this is hardly the time for a market timer to wade in. When the plan goes all-in, that’s when timer’s should follow its lead.

      However, timers usually lose to the market for precisely the reason your question highlights. They sit on the sidelines for too much of the non-bear market time, losing profits. Bear markets are actually quite rare, despite the media’s obsession with them. Most investors will experience only four in their lifetimes, and the stock market has historically risen two thirds of the time and fallen only one third. This is why the odds favor bulls, and staying invested.

      Emotionally, this is hard for people, which is why a rational reaction signal is necessary. I recommend reading “The 3% Signal” for more on this, and then implementing the leveraged version of the plan if you still want to go that route. It’s a prudent way to put the higher volatility of leverage to work without needing to time the market.

      Jason

  5. Graham Velasco
    Posted May 7, 2016 at 2:19 pm | Permalink

    Hi Jason,
    First of all, I have read all of your books and think they are absolutely brilliant. Second, I’m 29 years old and about to roll my high-fee, “expert”-run 401k account money into a Roth IRA. I only have $12,000 in that account so I feel that it is a good decision. I mentioned my 3sig plan and what it entailed to a Vanguard rep, who believed it was too risky. She advised me to mix in an international fund and some safer bets into my portfolio. I tried to explain to her that the bond fund precisely achieves that aim. My question is this: Would you say that running 3sig in my Roth and using dollar cost averaging to buy and hold a Maximum Midcap fund in a non-retirement account is the best use of my money? I’m debating between Maximum Midcap and a small cap Vanguard fund. It is tough for me to find another person who has read all of your work and understands what I’m trying to do. Because I’m a first-time investor, I’m a little fearful to say the least. It would mean a lot to me if you could give me even a one sentence reply. Truly, I am a huge fan. Thank you so much for attempting to drag America out of its instant gratification-needing, self-entitled, financially destructive ways. Take care :-)

    • Posted May 10, 2016 at 12:50 pm | Permalink

      I think I can spare more than one sentence, Graham!

      It’s true that advisors are too risk-averse. You will achieve no additional safety by diversifying beyond the already very diversified small-cap stock segment and general bond market, which the plan does. Further, the plan thrives on the volatility of the small-cap stock segment. The more it moves, the better your results, which is part of the reason the plan uses small caps. They are more volatile on the way to a higher long-term performance — perfect!

      If you can truly stay put, then DCA into one of Vanguard’s small-cap funds without ever selling prior to your retirement or an emergency should work well. However, be aware that most people can’t handle the emotional strain of crashing along with the market before full recovery, and usually puke at the bottom. To get around this, I suggest that running 3Sig in your non-retirement account will work better even after factoring in the impact of taxes on occasional quarterly sales of the stock fund. If you’re determined to use leverage, then I suggest that 6Sig as it’s run in The Kelly Letter is a good idea. It will bring the spirit of 3Sig with an unleveraged small-cap fund to the 2x leveraged midcap fund with a 50/50 target allocation instead of 3Sig’s 80/20.

      If in doubt, just run 3Sig everywhere and ignore all other advice. It’s almost all wrong, anyway.

      Best wishes,
      Jason

      • Graham Velasco
        Posted May 19, 2016 at 9:43 am | Permalink

        Firstly, I sincerely appreciate the time and effort you spent composing such a thorough and thoughtful response. Secondly, I am interested in hearing more about 6Sig. I plan on subscribing to the Kelly Letter at some point in the very near future, so I will read about it then. For the first time, I feel confident and ready. Having recently bought into VB and VFIIX, I have already been given a taste of the emotions that come into play via day-to-day market fluctuations. I told myself I wouldn’t check, but that’s like telling someone not to push the red button. It seems that in the world of investing, what you know and what you feel can be in direct opposition to one another, and most likely often are. While I trust myself to never sell for a loss of any sort, I don’t trust myself to not stress out about what’s happening on a day-to-day basis, therefore, I think it best to run 3sig in my regular brokerage account as well as my retirement account, regardless of possible tax consequences. With 3sig, I can simply trust the autopilot systematization of it all. You’ve more than earned my trust, which I’ve kept guarded ever since my “friend” told me I should give him $1200 to invest in foreign exchange funds on my behalf at age 17. After he lost all of the money I entrusted him with, I turned into the person you’ve described (the single mother-though I’m not a woman and don’t have kids lol- who has been burned and feels the need to be ultra conservative) up until this point. I can tell that you are genuine and don’t oversell your ideas. You rely on the ideas to sell themselves, which they should and do. I will continue to purchase anything you publish and will also continue to recommend your books to every person I know. Wishing you the very best :-)

  6. Graham Velasco
    Posted May 8, 2016 at 6:56 am | Permalink

    Does it matter whether you use mutual funds or ETFs for 3sig? I planned on using mutual funds because I can easily meet the minimum investment standards, but I see the mentioning of ETFs everywhere in these forum posts, and I’m wondering whether they might be a better choice.

    • Graham Velasco
      Posted May 8, 2016 at 9:09 am | Permalink

      I just bought 87 shares of VB and $3200 worth of VFIIX. So I actually have a stock ETF and bond mutual fund. We’ll see how it goes. Thank you so much for sharing your extensive knowledge with us!

    • Posted May 10, 2016 at 12:38 pm | Permalink

      Either way is fine, Graham. Use what’s easiest to use in your account.

  7. Benjamin Scheer
    Posted June 26, 2016 at 5:57 am | Permalink

    Hi Jason,
    I just finished Stock Market Investing and I’m starting to research stocks. What resource would you use to find even your 60 favorite stocks before narrowing down to 20? I’m not sure where to start. Thanks!

    • Posted July 2, 2016 at 2:59 pm | Permalink

      Hi Ben,

      I replied to your email asking this question. Did you receive it?

      Jason

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