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Improve Your Portfolio with the Best Automated Investing! 30 Years of Human Experience, Not A Robot.

June 28, 2023

“I’m interested in automated investing but having trouble taking the leap.”

“Is automated investing a good approach?”

“I’m concerned about entrusting the management of my money to robots.”

If you’re reading this article, you’re probably interested in automated investing but have these concerns.

Recently, there has been a lot of talk about robots and AI, like ChatGPT, and it’s understandable to be cautious about entrusting your assets to a robot.

The internet is flooded with information and conflicting claims, making it challenging to find the right fit for yourself.

To help, I will leverage my 30+ years of investing experience to explain the stress and issues associated with traditional investing, and delve into the value of automated investing systems. I will also introduce my unique, self-developed automated system, created through years of research and testing.

By reading this article to the end, you will not only grasp the benefits of automatic investing but also understand how my Signal plan combines automation with human elements to create an outstanding system.

Contents

  1. What is an Automated Investing System?
  2. Exploring the Benefits of Automated Investing
  3. Signal System: The Automated Investing System I Developed
  4. The Kelly Letter: Why It Excels Over Robo-Advisors in Automated Investing
  5. Summary

1. What is an Automated Investing System?

An automated investing system usually refers to a method of managing investment portfolios using computer algorithms and technology. It involves the use of online platforms or apps, where computers select and manage investments on behalf of investors.

2. Exploring the Benefits of Automated Investing

  • Avoid paying high fees to investment advisors.
  • Reduce stress and anxiety.
  • Make decisions without being influenced by emotions.
  • Prevent excessive impatience and reactive behaviors.
  • Avoid reckless actions driven by overconfidence.
  • Prevent judgment errors caused by information overload.

Before delving into the benefits of automated investing, let’s consider what is expected of you before you start investing. These are likely things you already know from various books, websites, and personal experiences, so I’ll provide only a brief overview:

  • Financial goals and planning: You need to understand your investment objectives, risk tolerance, and investment time frame, and develop an investing strategy based on them.
  • Risk management ability: Investing involves inherent risks. You need the ability to manage losses resulting from market fluctuation and price changes in investment products.
  • Time and patience: Investors need to have patience and take a long-term view when making investments. Investing is not trading.
  • Research and information gathering: You’ll need information on market trends, company financials, and other relevant data to make informed investment decisions.
  • Decision-making skills: Good investors analyze information and make rational decisions in a calm and logical manner.
  • Willingness to learn and adaptability: The best investors are eager to learn, keep their minds open to new information, and adapt to new investment approaches—even unconventional ones.

In addition to these, it’s important for beginners to accumulate knowledge and experience in investing.

Investing involves using your own and your family’s valuable assets. As I mentioned above, it requires certain qualities and is not an easy task, because it comes with inherent risks. Additionally, it can create various psychological and emotional challenges.

The following are common issues that investors experience, which I hear about from my readers on a regular basis:

  • High advisory fees: Banks and brokers charge significant fees.
  • Stress and anxiety: Market fluctuations and investment outcomes can lead to losses, causing stress and anxiety. Even paper losses cause some people to lose sleep.
  • Emotional decision-making: Investors need to make rational decisions, but they can be influenced by emotions, leading to distorted thinking and decision-making. Even pros fall prey to this, and cognitive biases, which lead to errors in judgment.
  • Excessive impatience and reactive behavior: Excessive impatience and reactive behavior can result in short-term trading and portfolio disruptions, and derail a carefully-laid long-term plan.
  • Overconfidence: Some investors show excessive confidence in their judgments and predictions, leading to underestimating risks and engaging in reckless investing actions. As one investing pro friend of mine puts it, “People who bet the farm, lose the farm.”
  • Information overload: Excessive consumption of information and information overload can make decision-making difficult and increase the risk of being misled by inaccurate or false information.

To address these issues, it’s important to deepen your investing knowledge, control your emotions, and engage in rational analysis and decision-making. These require a significant amount of time and experience. Therefore, I recommend automated investing as a solution that can mitigate these challenges.

It will enable you to:

  • Avoid paying high fees to investment advisors.
  • Reduce stress and anxiety.
  • Make decisions without being influenced by emotions.
  • Prevent excessive impatience and reactive behaviors.
  • Avoid reckless actions driven by overconfidence.
  • Prevent judgment errors caused by information overload.

Automated investing offers all of these advantages.

Next, I will introduce you to the details of my Signal system, which is operated by a human (me) while incorporating the benefits of automation.

3. Signal System: The Automated Investing System I Developed

My name is Jason Kelly.

I began researching investing in the early 1990s, and have been writing books and articles about the financial markets since 1994. You may have read my bestselling introductory stock book, The Neatest Little Guide to Stock Market Investing. I am recognized as a financial expert worldwide, and my works have been translated into over 10 languages, with my ideas being featured on television, radio, podcasts, and in publications.

However, I’ve never worked on Wall Street, nor have I managed other people’s money.

Instead, I dedicated myself to researching, testing, iterating, and sharing what I have discovered. I wanted to provide an affordable, effective, and straightforward system. During more than 30 years of experience, I conducted extensive research to develop a system that takes a rules-based approach, offering the advantages of automation while still being managed by a human, rather than relying on algorithms. This is what the Sig system is all about.

Let me explain it briefly.

The simplest “3% Signal” plan, which is the subject of my book, The 3% Signal, involves using just two funds: a stock fund and a bond fund. Every quarter, it takes the following steps:

  1. If the profit of the stock fund exceeds 3% during the quarter (for example, if a balance of $100,000 goes above $103,000), the surplus amount is sold, and the proceeds are invested in the safe bond fund.
  2. If the profit of the stock fund is less than 3% or the fund declines in value, money is transferred to the lower-priced stock fund from the safe bond fund up to the 3% target level, to compensate for the shortfall.

By following this approach, the 3% Signal plan automatically adjusts the allocation of capital based only on the price change of the stock fund—no pundit guessing games—and achieves the investing masterstroke of buying low and selling high. It minimizes risk and maintains an appropriate asset allocation.

Here’s how the process looks:

Did you notice that in this system, you don’t need any information apart from price fluctuation? This is key to the plan’s success.

When you take this approach, you will no longer be swayed by news and commentary, or feel pressure to make accurate future predictions, or rely on luck. All you’ll need to do is follow the simple set of rules and take action once per quarter.

This system resolves the shortcomings associated with traditional investing approaches advocated by high-priced advisors. It frees you from investing stress and enables you to dedicate your time to more meaningful activities, as your money grows in the background.

4. The Kelly Letter: Why It Excels Over Robo-Advisors in Automated Investing

My Sig system is a rules-based approach that calculates and executes trades based on predefined rules. Therefore, once you understand the rules, there is no need for human assistance or robots. However, in our daily lives, we are bombarded with sensational news from television and the internet, which can confuse our thinking and lead to panic. Even experienced professional investors face this challenge.

I mentioned earlier the problems associated with investing and how automated investing systems can solve them. While this is true, let’s examine the reality. How do humans perform in situations such as the covid crash of March 2020, when their portfolios rapidly decline?

In such circumstances, robots continue to invest calmly based on their algorithms.

But what about humans?

People who can withstand such situations without any support might want to try robo-investing. However, even experienced individuals may need reliable perspective and assistance when faced with such stressful circumstances.

The Kelly Letter has used only the Signal system since 2016, and has seen it through numerous big-headline events. The covid crash of March 2020 was the biggest stock market crisis during the time frame, which nobody anticipated, as I’m sure you are aware.

Even long-time subscribers to The Kelly Letter, who are investors themselves, also experienced panic in a similar manner. Everything was in an unknown state, with the world at a standstill, and nobody had a clear outlook for the future. I couldn’t predict what lay ahead. However, I was able to take action by following The Kelly Letter’s system. Weekly newsletters, subscriber forums, and Zoom calls with me served as crucial support, alleviating subscribers’ stress and anxiety, enabling them to continue running the system.

As a result, many people were able to endure the crisis and achieve significant profits in 2020 and 2021, as you can see on the letter’s performance chart:

Even in automated investing, you will inevitably experience anxiety and stress. The abundance of information and mainstream financial media’s attempts to manipulate your emotions make it challenging to stay true to a disciplined approach. The constant “buy this, sell that, watch out” tone of media presents a significant challenge to some automated investors as well.

The Kelly Letter, emailed every Sunday morning, offers several advantages over robo-investing, including the following:

Only Highly Relevant Information: I decipher and deliver only the necessary news from media’s information overload, which is so extreme that it’s sometimes hard to know simply what happened.
Alleviation of Anxiety: Based on quantitative evidence, I approach the market logically and analyze the movements of the world from a realistic perspective. Careful data analysis is invaluable, and increasingly rare.
Support in Maintaining the System: With logical explanations, I help alleviate your anxieties and navigate challenging times alongside you.
Forums with Me and Other Members: From beginners to veterans, members have the freedom to engage in discussions and learn from one another.
My Easy Investing Calculator: Members enjoy access to my online calculator to determine their quarterly investing actions. It includes an “Allocator” tab to easily follow the letter’s new quarterly allocation.

The Kelly Letter provides a superior support system compared with other forms of automated investing, helping to alleviate anxieties and stresses associated with the stock market.

Here are some testimonials from subscribers to The Kelly Letter:

 Jason breaks through our news bubble each week with a fairly-priced and independent perspective, practical guidance, the latest ideas under consideration, and a weekly coaching session which is crucial for many of us!

Mike Capern and Donna Capern
Slingerlands, New York
Jason Kelly’s weekly encouragement in his newsletter helps me stay the course. For that alone, I’m grateful and the newsletter reinforces sanity when many other venues suggest calamity.

Byron Anderson
Associate Professor, UW-Stout
The Kelly Letter is the only investment newsletter needed for anyone who is interested in understanding how markets work. Not only does it provide excellent economic commentary and clear investing advice, it is also full of deep philosophical insights and provides great tools to learn and apply various lessons in life. I am thankful for being part of The Kelly Letter subscriber community and hope it continues to grow in popularity.

Vasco Gurch
La Mesa, California

5. Summary

In this article, I covered the following topics:

  1. What is an Automated Investing System?
  2. Exploring the Benefits of Automated Investing
  3. Signal System: The Automated Investing System I Developed
  4. The Kelly Letter: Why It Excels Over Robo-Advisors in Automated Investing

With the recent advancement of AI, automated investing has become a popular investing approach adopted by many individuals. Systematized investing methods offer numerous advantages.

However, as mentioned above, even with automated investing it is not possible to completely eliminate human emotion and uncertainties. Maintaining a calm mindset is challenging. Please take this point to heart.

The Kelly Letter is delivered every Sunday and offers the following features:

  • Investments are made according to a complete set of rules on a quarterly basis. Subscribers have access to additional Signal plans, including 6%, 9%, and Income, as exclusive benefits.
  • The letter presents numerical evidence, logical analysis, and a realistic perspective to help you understand the small subset of information that matters.
  • It deciphers and analyzes only the essential news.
  • It provides excellent support to alleviate the concerns and stress associated with investing.

My goal is to help subscribers achieve not only financial success, but also provide them with the time and mental freedom they desire.

If you found this intriguing, I would be delighted to welcome you as a subscriber. If you have any concerns or questions, please don’t hesitate to reach out to me.

I wish you well in your investing journey!

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No, the Dollar is Not in Danger

April 19, 2023

No, the Dollar is Not in Danger — For a simple reason: there’s nothing to take its place.

Record your investing question at 303-747-4428, or email me.

——

Episode Notes

Note: The following is not a word-for-word transcript. For that, please see the episode on YouTube.

The dollar is back in the news, as it has been every few months for the past, oh, three decades or more. Consider some recent headlines.

MarketWatch
4/17/23
“The US dollar is under fire from rival nations. What happens to markets if the greenback loses its world dominance?”

Yahoo Finance
4/14/23
“US Dollar Slips to One-Year Low: ETFs to Gain/Lose”

Now, for some perspective, consider the following CNBC story from a decade ago.

CNBC
10/14/13
“Default Fears Put Dollar’s Reserve Status at Risk”

From that story comes a take that should be familiar, if you’ve followed recent news. Here’s a quote from the decade-old CNBC story:

“Anxiety over a potential US debt default has led some analysts to question whether the greenback’s days as a global reserve currency are numbered.”

But that was then, you might think, and this is now. Maybe the dollar survived that scare, but it might not survive this one. The dollar is in danger.

Before I provide some background, here’s a preview:

No, the dollar is not in danger.

The big picture is no different today than it was through the past umpteen dollar scares since the Reagan administration. You know why?

Because there’s nothing to take the dollar’s place.

Let’s go to a recent call about this issue.

Today’s call is from Michele Garner in Cape Cod, Massachusetts, whose brother is worried about the end of the US dollar as the world’s reserve currency:

Brother thinks with all the US debt countries will stop using the US dollar for trading. This will make the dollar worthless and therefore stocks worthless.

This is a repeating bearish warning, and as baseless today as it was every time I covered it in the past.

I’m not sure why it holds such appeal, but it’s easy to dismiss.

I’ll turn to last March 27th’s Note 13 as to why. From that letter’s “The Chase” section, which is the upfront executive summary of each Sunday letter’s contents. From The Chase of last year’s Note 13:

“It’s back: the baseless alarm that the dollar will lose its reserve currency status. As ever, all you need to know is the following:

“The dollar will not lose its reserve currency status, for a simple reason: there’s nothing to take its place.”

The feature article in last year’s Note 13 was titled “The Dollar’s Reserve Currency Status.” It began by referring back to the idea that there’s nothing to take the dollar’s place, as reported in Note 28 sent 7/11/21.

Why do I refer back to so many previous references to this idea?

To illustrate that it’s nothing new, just an apparently evergreen bearish scare point. It comes up anytime there’s a surge in government spending, a wave of fascism accusations, or a claim by hopeful Chinese analysts that a change of the international order is inevitable.

Back in September 2020, Ray Dalio, founder of Bridgewater Associates, believed the dollar’s reserve currency status was in jeopardy because of the measures the US had taken to support its economy through the pandemic.

Because he’s a big shot in the financial world, people said we should listen to Dalio, a “smart guy” and run from US assets.

I noted that the US had experienced social unrest for four months, but the dollar had not so much as wobbled on its perch. The country had been hit by hurricanes, wildfires, and pandemic arguments, but not once had the reign of the dollar looked tenuous. I concluded, quote from Note 28 sent 7/11/21:

“Through the vicissitudes of politics, social movements, and technological innovation, the Federal Reserve has remained a rock of stability. It even withstood direct attacks on its legitimacy by presidents demanding accommodative policies, and not just from the current administration. It is one of America’s most reliable institutions, indeed one of the world’s. Its steady hand on the tiller is not something the world will easily abandon.”

In 2021, data from the International Monetary Fund showed global foreign exchange reserve composition to be as follows:

2021 Global Foreign Exchange
Reserve Composition (%)
– – – – – – – – – – – – – – –
60 US Dollar
20 Euro
10 Other
6 Yen
4 Pound Sterling

It’s a long way from 60 to no longer being the reserve currency. The contender in second place is all the way down at 20, and is a basket case of a currency by comparison. From Note 28:

“Europe is in constant turmoil, a clash of cultures that fails to unite punctilious Germany with freewheeling Greece. Durability of the currency bloc is forever in doubt, a risk more perilous than another batch of Congress critters at the purse strings.”

“Oh, but what about China?” people ask.

China is the most overhyped potential economic leader of all time. It’s miles away from being able to lead the world—on much of anything, but certainly when it comes to reliable currency reserves. Again, from Note 28:

“China? Forget it. The mandarins in charge engage in so much financial flimflammery and opaque reporting that the renminbi could never cut it as the world’s chief currency. They don’t even have enough confidence to let it float freely on the exchange market. You and I will stand at the great ATM in the sky before the People’s Bank of China garners as much respect as the Federal Reserve and the European Central Bank. The renminbi accounts for 3% of central bank reserves, which is about 2.9 percentage points too high, in my view.”

On top of all this, people just plain misunderstand the implications of currency strength and weakness.

At first blush, it seems we should not want dollar weakness. We should want a strong dollar, right? Wrong. You know what was considered one of the drivers of last year’s stock-market crash? Dollar strength.

That’s right. It wasn’t higher interest rates per se, but their resulting dollar strength. Bulls said that the chart to watch for a turning point in the stock market was the US dollar, in hopes of it weakening.

Last year, from January 3 to its peaks in September and October, the dollar rose 18% against the euro and 30% against the yen. The October 3 cover of Bloomberg Businessweek read:

“Can’t Stop, Won’t Stop: The Fed has turned the US dollar into a wrecking ball—and there’s no end in sight to the carnage.”

What’s that, a strong dollar was the wrecking ball? Yes. A too-strong dollar is a problem, and was one of last year’s biggest worries.

October CPI killed that dollar rally, sending it lower ever since, and it might have been commentary on that that caught your brother’s attention. It certainly caught the attention of many bearish analysts, which is funny because they had previously said dollar strength was the problem.

Last November 10, Barron’s reported on why the weakening dollar should bode well for stocks:

“A falling dollar reduces the purchasing power of Americans traveling abroad, but investors are likely cheering the fall. … For one, it means that companies that derive revenue from abroad will see higher profits when they convert sales in international currencies into the greenback. … In the S&P 500, some 30% of company revenue is earned abroad.

“Secondly, if the reaction to inflation data leads to a sustained downward move for the dollar, it could also suggest that investor concerns about the economy are diminishing. Global investors tend to rush to havens like gold and the dollar when their concerns about macroeconomic issues rise.”

Michele, your brother mentioned high US debt as a possible reason for the world to reject the dollar as its reserve currency, but this is another old issue that has yet to matter. Very old, actually.

America’s national debt has been rising my whole life, and I was born in 1971. It’s been called a crisis in the offing ever since I paid attention, starting in the 1980s. So far, so good, and those betting against stocks, the dollar, and America due to the insane level of debt are lovers of long, long odds.

I agree in spirit: the national debt is out of control. I wish responsible politicians controlled the purse strings. But they never have and never will, and sovereign debt, which is to say country debt, is simply not the same as household debt.

It’s a reason people don’t understand it. They think of it like a credit card balance, but it’s not. The country makes the money that’s used to repay the debt. Talk about a key difference!

I covered US federal debt just last Sunday, in this year’s Note 3, when I looked at the debt ceiling debacle on tap, courtesy of House Republicans led by new speaker Kevin McCarthy.

Drawing on data from Federal Reserve Economic Data (FRED, run by the St. Louis Fed), I reported:

US Federal Debt ($T)
– – – – – – – – – – – – – – –
14.7 in 2011
16.0 in 2012
16.9 in 2013
17.8 in 2014
18.3 in 2015
19.5 in 2016
20.1 in 2017
21.4 in 2018
22.5 in 2019
26.1 in 2020
28.7 in 2021
31.4 in 2022 (Statista estimate)

Yet, in 2021 the US dollar still comprised 60% of global foreign exchange reserves. What happened to it last year? It stayed right around 60%, according to a 9/15/22 report from the Congressional Research Service, “The US Dollar as the World’s Dominant Reserve Currency”.

From that report:

“The dollar has functioned as the world’s dominant reserve currency since World War II. Today, central banks hold about 60% of their foreign exchange reserves in dollars. About half of international trade is invoiced in dollars, and about half of all international loans and global debt securities are denominated in dollars. In foreign exchange markets, where currencies are traded, dollars are involved in nearly 90% of all transactions.

“The dollar is the preferred currency for investors during major economic crises, as a ‘safe haven’ currency. During the global financial crisis of 2008-2009, for example, and amidst the economic turmoil associated with the Coronavirus Disease 2019 pandemic in 2020, investors sought US dollars, expecting the dollar to retain its value. In both crises, the US Federal Reserve adopted extraordinary monetary authorities and currency swap lines with other central banks to provide liquidity and dollars.”

There’s just nothing to take the dollar’s place, high federal debt notwithstanding. And you know why? Because other countries are in just as much debt as the US. It’s not a uniquely American situation.

US debt to GDP is about 125%. Japan’s is 225%. Italy’s is 150%. The European Union’s overall debt-to-GDP is 86%. China’s is 80%—at least, but probably higher when we account for its constant lying in reports.

Nikkei Asia reported on 12/7/22, in a story headlined “China’s debt ratio hits record high at 3 times GDP” the following:

“China’s debt as a percentage of its economy hit a fresh high at the end of June, with local authorities borrowing heavily to underpin an economy weighed down by the central government’s zero-COVID policy. …

“The US, China’s main geopolitical rival, saw its debt-to-GDP ratio temporarily top China’s in late 2020 and early 2021.

“But the ratio has since fallen, coming in more than 30 points below China’s at the end of June, amid an economic recovery as well as interest rate hikes that have hit the brakes on borrowing. America’s future growth prospects also look brighter, thanks partly to immigration expanding its population.”

Which brings us full circle back to the main reason we need not worry about this issue:

“The dollar will not lose its reserve currency status, for a simple reason: there’s nothing to take its place.”

That’s been the case since World War II, and it’s still the case.

To recap:

The dollar’s reserve currency status is not threatened. The stability of the Federal Reserve and America’s economic transparency have no peers. High federal debt doesn’t matter because potential rival currencies come from other high-debt places. Dollar weakness relative to other currencies is no problem for stocks, and in fact is usually the preferred condition.

A threat to American finances bigger than the debt is the absurd debt ceiling debacle used by showboating politicians. Another one of these is on the way this year, but is not going to dislodge the dollar from its perch. Debt ceiling games are more of a problem for Treasuries due to questions they raise about the nation’s creditworthiness. All for nothing whatsoever, I hasten to add.

In short, the dollar’s position in global finance is secure. Therefore, it represents no threat to the US economy or stock market.

Michele, please assure your brother that he can disregard this non-risk.

Sources Mentioned:

US Department of the Treasury. Fiscal Service, Federal Debt: Total Public Debt [GFDEBTN], retrieved from FRED, Federal Reserve Bank of St. Louis

The US Dollar as the World’s Dominant Reserve Currency, 15 Sep 2022, Congressional Research Service, PDF

China’s debt ratio hits record high at 3 times GDP, 7 Dec 2022, Nikkei Asia, article

———

If you’re not a Kelly Letter subscriber, why not? I’d like to welcome you!

Please subscribe here.

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Will ChatGPT Drive a Tech Bull Market?

April 12, 2023

Will ChatGPT Drive a Tech Bull Market? — Sure it will. It got lazy mega tech off the dime, accelerated corporate computing upgrades, and will keep improving.

Record your investing question at 303-747-4428, or email me.

——

Episode Notes

Note: The following is not a word-for-word transcript. For that, please see the episode on YouTube.

Colin in Chandler, Arizona asked via email whether I think OpenAI’s ChatGPT will drive a tech bull market.

Sure I do. Here’s why:

<> It finally got lazy mega tech off the dime.

The browser plugin is particularly dangerous to Google, et al.

Quote from last Sunday’s Kelly Letter:

“If ChatGPT users can do most of what they want without searching Google or visiting websites, the traditional online revenue model is in deep trouble. Google could lose much of its Search ad business as well as business from clicks on ads it places outside of its properties. For the first time in two decades, it’s possible that ‘online’ will not remain synonymous with Google.

“You know who dislikes this idea? Google.”

<> The need for accelerated computing, data center scaling, new chips, cloud and other AI services.

NVIDIA jumped all over this. From the Generative AI page on its website, you can get a sense for how it’s making more money on the wave of AI hype started by ChatGPT’s launch on November 30:

“Generative AI capabilities are taking the world by storm. AI can now summarize text, compose images, write code, and more. Enterprise applications need AI that’s customized to focus on their domain, be knowledgeable about their business, and have the skills necessary to accomplish high-value tasks. These models need to scale across business functions and learn as the business grows and evolves. Generative AI models will codify your organization’s intelligence.”

<> There’s a long way to go, plenty of room for improvement.

Originality may flatten out, as we’ve already seen in music, movies, and products recommended by algorithm. Algos get into a loop that then detects popularity among products that were in the loop before, and down the spiral we go until it’s nothing but templates everywhere.

Sigal Samuel wrote about this at VOX on Monday that recommendation algos, with their “you liked this, you might like that” approach end up homogenizing our consumption patterns:

“Music starts to sound the same; Hollywood worships reboots and sequels. We all cook the same Epicurious recipes and, more worryingly, read the same articles — which tends to be whatever plays well with the Google algorithm, not what’s been buried at the bottom of the search results.”

Partly this is a case of most people failing to grasp just about anything. How many technologies have we seen offer wonderful promise in concept, and to power users who get them, only to go off the rails once the crowds arrive? Social media springs to mind.

<> Early AI companies may not be the winners.

Just as Netscape did not end up owning the internet, so OpenAI may not end up owning AI.

This is a reason I prefer indexing.

Perusing the YTD performances through the end of last week, we see that general tech rose about 20% in Q1, same as most mega tech stocks and most unleveraged tech funds, and 3x funds rose about 60%.

YTD Price Change (%)
Through 4/6/23
– – – – – – – – – – – – – – –
85.0 NVDA
79.6 META
50.2 TSLA
26.7 AAPL
22.7 GOOG
21.6 MSFT
21.5 AMZN

61.9 SOXL Semi 3x
61.4 TECL Tech Select 3x
58.6 TQQQ Nasdaq 100 3x
21.8 XNTK NYSE Tech SPDR
19.8 XLK Tech Select SPDR
18.9 FTEC Fidelity MSCI IT

Because it’s hard to know who AI’s winners will be, I recommend using a tech index fund to invest in the technology’s potential. That’s what drives my 9Sig and Income Sig plans.

———

If you’re not a Kelly Letter subscriber, why not? I’d like to welcome you!

Please subscribe here.

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What to Buy in the Banking Bust

March 22, 2023

Harry asked on my question line (303-747-4428) if the recent banking crisis presented investment opportunities in bank stocks or ETFs.

Yes.

The best approach to an industry-specific incident like this is to own a sector ETF. Doing so gets around bankruptcy risk, while still taking advantage of temporarily depressed prices. You don’t want to own shares of Silicon Valley Bank, but the bank sector.

Here are some ETF candidates, with price change since the sector peak on February 7:

Bank ETF Price Change
2/7/23 to 2/21/23 (%)
– – – – – – – – – – – – – – –
-13.6 XLF Financial SPDR
-13.7 VFH Vanguard Financial
-24.7 KBE Bank SPDR
-28.9 KRE Regional Bank SPDR
-31.6 IAT iShares Regional Bank

Leveraged ETFs haven’t fared much differently, given their broader focus, but might come back stronger in the rebound:

Bank ETF Price Change
2/7/23 to 2/21/23 (%)
– – – – – – – – – – – – – – –
-22.3 UYG ProShares Fin 2x
-37.5 FAS Direxion Fin 3x

Another option is to buy a smaller-cap index with exposure to financial stocks.

In The Kelly Letter, I use the S&P SmallCap 600 and S&P MidCap 400. Financial stocks comprise 18% and 16% of each, respectively. Their associated stock funds that power my 3Sig and 6Sig plans are IJR and MVV. Here’s how they fared since February 7:

IJR and MVV Price Change
2/7/23 to 2/21/23 (%)
– – – – – – – – – – – – – – –
  -9.8 IJR SmallCap 600 1x
-17.7 MVV MidCap 400 2x

Because getting in at a bargain price is only half the battle, I recommend approaching this moment in the same manner I recommend always approaching the stock market: with a rules-based system that reacts to price change only—no guesswork.

For that, this bargain moment offers newcomers a fine entry to my 3Sig and 6Sig plans. For that matter, my triple-leveraged 9Sig plan still trades at a discount to where it stood before the decline of 2022. All three plans, along with Income Sig, appear every Sunday morning in The Kelly Letter.

For perspective on the relatively low danger of this banking incident, I offer the following, from last Sunday’s letter:

“The average amount of cash on hand across banking is 13%, well over the 7% and 5% that SVB and Signature maintained. The average percentage of assets in bonds is 24%, compared with 55% at SVB.

“This is one reason that the current banking incident poses little systemic risk. Another is that it does not involve widely distributed ‘toxic assets’ of the type we saw in the subprime mortgage crash.

“That crisis was much bigger because almost every financial institution in the subprime era owned collateralized debt obligations (CDOs). Bad mortgages were securitized into time bombs on every balance sheet. When the no-income, no-job applicants (NINJAs) stopped making payments, lit fuses extended to every corner of the global financial system.

“SVB, Signature, and the latest struggler, First Republic, pose no such systemic threat. They got themselves into trouble through localized mismanagement.”

That makes this a good chance to jump on a sector sale or—better yet—start a long-term, rules-based system that beats the market over time.

I hope this helps!

Posted in 3Sig, 6Sig, Financial Crises, Sig System | Comments closed

Is JEPI Too New to Trust?

March 8, 2023

Is JEPI Too New to Trust? — If JEPI had a decade of data, would you trust it more? Probably not much.

Record your investing question at 303-747-4428.

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This Episode In Article Form

Data as of 3/3/23

Note: The following is not a word-for-word transcript. For that, please see the episode on YouTube.

Sunil in Jacksonville, Florida had more questions about JEPI, the JPMorgan Equity Premium Income ETF, which I compared with QYLD and other income ETFs in my February 15 episode.

Summary of Sunil’s voicemail recording:

There’s been a lot of buzz about JEPI. I have two questions:

1. How is it better or worse when compared with other similar ETFs, such as QYLD.

2. It’s new. Do we have enough historical data to trust it?

For the first question, please listen to my February 15 episode, which is all about how JEPI compares with QYLD and other income ETFs. The title of the episode is: “Income ETFs: JEPI vs NUSI, QYLD, RYLD”, thus, exactly what you’re looking for.

A quick recap here is that JEPI is designed to be less volatile than the S&P 500. It’s an actively managed, defensive equity fund that also runs a covered-call operation. It’s supposed to move less than its index. It’s not doing anything wrong when it rises less and falls less than the S&P 500. It’s doing what’s written on its label.

As for my plans, they prefer price movement, i.e. volatility, in their growth and income funds, because they run quarterly rebalancing programs. In such a scheme, lower prices can be useful. In a year like 2022, when everything goes down, there’s minimal benefit. But most years aren’t like 2022, and anybody investing as if they are will learn this the hard way.

They already are. Year-to-date through March 3, JEPI’s price has fallen 0.8% compared with a 4.6% gain for QYLD.

If you’re planning to park money in one of these covered-call ETFs for an extended period, and want to minimize volatility, then JEPI is a good choice. If you’re looking for more aggressive income and don’t mind more volatility or, better yet, are running a plan like my Income Sig that uses volatility in a rebalancing scheme, then QYLD is better.

As for whether we have enough historical data on JEPI to trust it, I think so.

Income ETFs are going through lots of innovation recently, with many new funds trying different techniques. JEPI is among these, writing out-of-the-money S&P 500 Index call options to generate monthly income. There’s nothing particularly exotic about this. It’s more complicated than many investors want to manage on their own, but that’s why it could be worth paying JEPI to do it. Call options are a good way to generate income.

JEPI began operations on 5/20/20. We’re coming up on three years of data, which already show us a reasonable amount of price volatility and 33 straight months of distributions. That’s enough time to see it doing what it’s trying to do, and over a sufficiently volatile time frame.

If JEPI had a decade of data, would you trust it more? Probably not much, because past results are not indicative of future ones. You don’t need all that much of a time frame to see whether a technique is working or not, and it seems that JEPI’s is.

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Posted in Income Sig, Kelly Letter Podcast | Tagged | Comments closed
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