The Kelly Letter is built on a unique three-tier system that divides your portfolio into complementary ways of making money in the stock market. They are:
- Tier 1: Steady 3% quarterly growth by value averaging the S&P SmallCap 600 index. With no more than four trades per year, this tried-and-true method is a good friend in volatile markets. It tracks a formula to determine whether you should buy more, stand pat, or sell excess profit to maintain rock-solid 3% growth each quarter. It’s a very popular strategy, fully explained in Chapter 4, “Permanent Portfolios,” in the 2010 edition of The Neatest Little Guide to Stock Market Investing.
- Tier 2: Market beating potential by leveraging and timing the S&P MidCap 400 index. In a steadily rising market, this method adds more money each month to an investment that returns twice the performance of the midcap “sweet spot” of the market. As with all leverage, the risk is the downside and in this case it’s twice the market’s loss. To get the most out of the upside while limiting the downside, we rely on three technical measurements on the midcap chart: simple moving average, MACD, and relative strength index. When at least two of the three signal in the same direction, we make a move. Historically, the approach has captured about two thirds of the upside and avoided about two thirds of the downside. This strategy, too, is explained in Chapter 4 of The Neatest Little Guide to Stock Market Investing.
- Tier 3: Further improve portfolio performance by trading individual stocks and ETFs. This the stock-picking zone. The tier’s positions are further divided into three groups: capital appreciation, dividends, and hedges for downside protection. Each idea is assigned a risk tag of [H]igh, [M]edium, or [L]ow. In the tier’s Watch List, we monitor just a handful of ideas for weeks, months, and occasionally years for the right price. We often adjust the target price several times before buying, too. This patient, methodical approach isn’t for everybody, but has worked well for us.
This segmentation of your money provides a solid balance for uncertain markets — which are the only kind available!
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