Value Averaging Plan Sells Profit

Yesterday, The Kelly Letter’s limit order to sell part of its small cap stock ETF filled at precisely the price we specified.

This was part of our Tier 1 plan, which is a value averaging strategy that sells performance in excess of a 3% quarterly growth target. Because the ETF gained more than 3% last quarter, we automatically sold the surplus. One day, when it gains less than 3% or posts a quarterly loss, we’ll use the proceeds from quarterly sales like yesterday’s to buy more shares at the cheaper price to get the plan back on its 3% growth track.

Yesterday marked our fourth quarterly sale in a row. The last time the plan bought to compensate for underperformance was a year ago, after the rough first quarter prior to the rocket higher. Small company stocks, as exemplified by the ETF we use, have grown at a rate faster than 3% per quarter for a year now.

What does this mean for market timers? Beats me. The strategy doesn’t try to guess and doesn’t care. If small cap stocks keep growing at a rate faster than 3% per quarter, the plan will keep selling the surpluses all the way up and that will have been the wrong move. Buying and holding would have been smarter because each quarterly sale would have removed capital from the rising line.

However, even years later the plan can justify itself. That’s what happened in the bull run from the dot com bubble collapse to the housing bubble collapse. The market kept rising and the plan either stood pat on the 3% growth line or sold strength. When it all came tumbling down again, those once seemingly “dumb” quarterly sales looked brilliant when they provided the cash to buy into the extreme weakness of 2008 and early 2009 to not only keep the plan on track, but profit handsomely during the last year of levitation.

The whole beauty of the plan is that we don’t have to think about whether it’s getting the timing right or wrong. We just have to follow it, secure in the knowledge that come hot or cold weather our Tier 1 will keep growing at 3% every quarter.

This entry was posted in Uncategorized. Bookmark the permalink. Both comments and trackbacks are currently closed.
  • The Kelly Letter
    A Complete Investment Management System
    The Kelly Letter  every Sunday morning by email.
    Like no other. Many subscribers say this is the best read of their week, astonishing in its ability to distill seven days of noise into one succinct overview of the very few items that might matter. Start your Sundays right!
    A one-page Quick Start Guide
    with page number references to full information in The 3% Signal. You'll receive access to this right away so you can begin transforming your portfolio into a performance machine immediately.
    The 3Sig Calculator.
    A thing of beauty! You'll use it to generate your own personal signals every quarter including exact share amounts to buy and sell based on your account balances. It emails you the results to make later quarters easy by keeping last quarter's numbers at your fingertips. Some subscribers say this tool alone justifies their subscription price.
    The subscriber-only section of this website
    where likeminded investors are commenting on notes and discussing in forums. Jason joins these interactions every day. They're a treasure trove of investing tips and wisdom.
    The archive of Kelly Letter notes.
    It’s a research center, searchable and smartly tagged to make gathering time-stamped material on covered subjects easy.
    The subscriber podcast.
    Jason reads every letter word-for-word. This feature was requested by subscribers who prefer audio learning. They listen on their Monday morning commute, during a workout, or while reading along at their computer.

    Save 17%

    Pay as you go
    Or sign up to receive free email and learn more about the system.
Bestselling Financial Author