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47 Comments
How to decide about buying ETFs? In The Neatest Little Guide to Stock Market Investing, you provided some variables to decide about buying single stocks, but not for ETF. How to compare ETFs such as VOO, SPY, and VGT? Which variables do we need to consider? How to split the money in ETFs?
Jason-
I enjoyed reading your stock market investing guide.
It was clear, retention was improved with examples, etc.
You also took the reader from Theory to practice well.
The only thing which I hoped to see that was missing
was guidelines for using an inverse index
(from your appendix)to offset short term losses incurred
during a bear decline. The request could be timely,
given that we are likely toward the end of the latest bear market.
I believe this would be useful, with parameters provided,
for minimizing losses or even making $ when a bubble breaks, etc.
I was also wondering whether the 80/20 stock / bond index mix
in the 3% signal should change as retirement years approach
(I’ll be 69 in several months)
Thoughts?
Thx
ER
Thank you for the kind words, Ed.
My backtesting of the three Sig permutations I run in my letter (3Sig, 6Sig, 9Sig), plus my real-world running of the plans for nearly a decade now, show that trying to minimize downside with hedging results in lower long-term performance. It’s better to simply plan to buy into weakness, accepting the possibility of worst-case scenario of going all-in then just waiting out what downside remains. This scenario isn’t all that bad, really, because by the time the plans go all-in the decline is nearly over, and is rare.
So, I do not offer hedging guidance in my letter. I run the plans as presented in The 3% Signal, with just one stock fund and one bond fund.
Happy Sigging,
Jason
Dear Jason,
I hope your are well.
A friend of mine and I have been running our portfolios on 3Sig for about two years now.
We both use VBR (70-90 percent range) for stocks and BLV (10-30 percent range) for bonds.
During the last months, BLV has been decreasing under my friend’s BLV price hitherto payed on average.
At the same time, VBR has been constantly increasing, that is over her VBR price hitherto payed on average.
Her current portfolio market value amounts to about USD 4,000, her next quarterly contribution to USD 500.
Her BLV portfolio share has risen to about 35%, but, and here’s the “problem”: She could only rebalance through
selling bonds with a loss, and buying stocks over her VBR price hitherto payed on average. Even if she only buys VBR, her BLV portfolio share would still be “too large” and her VBR price hith. p. on avg. would go up.
I would say, she should, again, only buy bonds at the next signal, since, eventually, she will have a lot to sell and
reinvest into stocks. Also, increasing her average VBR price would mean lowering her return potential for VBR, in a way.
I would really appreciate, if you could share your thoughts on this or on situations like this, in general, regarding 3Sig and rebalancing/portfolio shift. I know that if you would share your opinion, this would not
be an investment advice I’d have to follow or could base any claims on, later.
All the best from Germany,
Alexander
Dear Alexander,
The average price per share does not matter. Only the growth of the balances matters.
Therefore, your friend should follow the signal, even selling her bond fund shares at a minor loss, to keep the plan on track. Eventually, the signal will change for her (account growth making her contribution a lower percentage, market dynamics, etc.), and the flow will move in the other direction.
The plan can feel distorted in the beginning when contributions are outsized compared with the portfolio balance, causing every quarter to signal buying more shares of the stock fund.
I hope this helps, and wish her well.
My best,
Jason
Hi Jason,
Thank you so much for writing financial books in plain English!
So, we’re finally ready to take the plunge on 3Sig – I just thought I’d check back here for any final thoughts before pulling the trigger. And I’m glad I did…
We already have a Schwab account so we were going to choose SCHA and SCHZ, based on your comments in the book that the specific ETF choices are not as important as getting low expense ratio and transaction fees.
Is that still your opinion?
Reading the last Q&A above (from Craig, 05/22/17), I’m wondering if you have any updates to that general guidance.
Also, do you think that SCHZ still has the right balance of bonds to be a good choice? I’ve recently read an article suggesting that the underlying index it tracks has changed in composition over the last 10 years, such that it’s potentially locking in too much longer term bonds at the crazily low interest rates we’ve had around since 2008, given that interest rates finally seem to be on the rise again.
Many thanks for any thoughts you have on the above
Best regards,
Richard
Hi Richard,
You’re most welcome for the books, and congratulations on beginning your 3Sig plan! You’ll look back and wonder how you ever got by without it. To your questions:
<> Yes, you should still target the lowest-expense ETFs. SCHA and SCHZ are excellent choices for 3Sig.
<> Yes, I prefer IJR to other small-cap ETFs for its higher volatility and slightly better long-term performance, but SCHA remains one of my top three picks: IJR, SCHA, VB. Just starting the plan is far more important than which of the three small-cap funds you use to power it. If SCHA is best for you in your Schwab account, proceed confidently with it.
<> Don’t worry about SCHZ’s index. It’s fine. It’ll update its portfolio of bonds with higher interest rates as they percolate through the system. Any price fluctuation en route to higher yields will simply be used by the Sig system as it moves money into and out of the bond fund quarterly.
I hope this helps, and happy Sigging!
Jason
Trigger pulled, with IJR & SCHZ!
On further checking, I discovered that the buy/sell fee for IJR through Schwab is just $4.95 per transaction, regardless of size or frequency, while SCHA and SCHZ are both commission free.
For such a small amount (max of $20 p.a.), it seemed worth going for IJR over SCHA to get the better performance.
Thank you again for your help and giving me the confidence to stop dithering and just do it!
You’re very welcome, Richard, and congratulations! You’re going to wonder how you ever invested otherwise. Jason
Under performance…
Hi Jason~
I have a question regarding performance over a period of time. I am currently investing into SCHA and SCHZ, however the SCHA vs IRJ are vastly different in performance over the YTD, 1yr, and 2 yr. It would seem as though on that invested into the IJR have more growth…. and having it been over time, would have higher cumulative annualized returns. SO, bale out on SCHA and transfer over to IJR or leave it be?
With gratitude,
Craig
Hi Craig,
We can’t say with certainty that IJR will maintain its performance edge over SCHA and other small-cap funds, but I’ve always preferred the S&P SmallCap 600 to the Russ 2K and other small-cap indexes. I like the concentration, and the slightly higher volatility helps plans like 3Sig, which take advantage of it.
Since it’s no big deal to switch from one ETF to another, why not go with IJR? It’s what I run in the letter’s 3Sig plan.
My best,
Jason
Excellent blog you have here but I was curious if you knew
of any forums that cover the same topics talked about here?
I’d really like to be a part of community where I can get feed-back from other experienced
people that share the same interest. If you have any suggestions,
please let me know. Bless you!
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I just finished reading TNLGTSMI, 5th edition. I finished the last page and turned right back to the first.
I am starting to invest into the markets and looked for the simplest, highest regarded resource available. Thank you for the layman’s terms investment breakdown.
I know that with anything worth doing in life; you get out what you put in. Fastidious research and scrutiny is what you preach, and clearly is the right method of practice.
Thank you for this insightful knowledge. It will be the foundation for hopefully many successful years in the market, and maybe even land me a mythical “tenbagger.”
Thanks again, and wish me luck!
You’re welcome, Max.
I do wish you luck, and I also suggest you continue your study of the stock market with The 3% Signal, the book that presents in detail why reacting to prices alone is the best way to profit from the market. Don’t get distracted by pundits and their constant hand-wringing.
All my best,
Jason
Jason,
Just finishing your “The Neatest Little Guide to Stock Market Investing” (5th Ed.) – Great Book, Many Thanks!
Question: With a (roughly) 3 year ‘update cycle’* to your ‘Neatest Guide’, will a 6th Edition be out in the near future?
(* First Edition came out in 1998, followed by editions in 2004, 2007 & 2010, with the 5th Edition in 2013.)
Your “The 3% Signal” is at the ready for next read (along with your “Financially Stupid People Are Everywhere: Don’t Be One Of Them”).
Carpe Diem!
Paul Mathis
I have been using AIM Automatic Investment Management since 1995 and like your 3% signal it reacts to the market as opposed to predicting it. It only manages securities instead of picking them and works more safely with funds.
Yes, AIM is a fine method. It tends to underperform 3Sig in most time periods, but not all, and both are heads and shoulders above the usual stock-picking madness pushed by media and the financial industry. Good work putting yourself on a rational track!
Have read your Neatest Little Guide to Stock Market Investing and found it eye opening, simplifying, and can hardly wait for the 3% er!. I’ve been in the market for 25 years with 4 different brokers. No big winners. And being on my own now for four years is no better even though I do follow the Motley Fool Advice.
So I take it you would never consider futures or options. The advertising is intense with high promises. Even the Motley Fool has a program to study and follow with promise of profits a high percentage of the time.
I’m in a wait and see mode on this and would appreciate a response.
Thanks so much for your studies, clear thoughts and great writing,
Nick Turman
All the research I have found recommends against buying Proshares MVV or any leveraged indexed fund etf as a buy and hold. The say at the most, 4 day hold and then either cut your losses or grab your gains. I like your ideas in your book the neatest little guide, but cant find any support on your plan for beating the dow with the midcap 400 leveraging. Any thoughts?
They’re just wrong, Tom, and I don’t know why they can keep making the same wrong argument in the financial media despite historical evidence disproving it. Here’s the recent track record of buying and holding the leveraged ETFs versus the plain Dow:
http://jasonkelly.com/resources/strategies/#smi
See what I mean?
[1] what % of total liquid net worth do you recommend people invest in the base plan consisting of IJR and LQD?
or
IJR and BIV?
[2] can we start the plan any day or do we wait till the first of caledar quarter?
[3] do we buy $8,000 of IJR all at one time or do we spread it out over time?
Do we buy $2,000 of LQD or BIV all at one time or do we spread it out over time?
Ishwar,
1. The plan is secure enough to safely handle 100% of your liquid net worth. If you want to run something less reliable but possibly more fun, such as a stock-picking program, I recommend limiting it to no more than 20% of your liquid net worth and running the remaining 80% with 3Sig.
2. Start the plan any time you’d like, but preferably after a quarterly buy signal. The most recent signal at the end of June was a mild buy, and IJR has gone up only slightly since then, so now is a good time to get started.
3. With $8,000 IJR and $2,000 BIV or LQD, I recommend just going in all at once. For larger balances, spreading it out can be emotionally comfortable, but usually lessens performance because the stock market rises more often than it falls (ever-present alarmist commentary notwithstanding). For more, see “Starting with a Large Cash Balance” on p. 134.
Best wishes,
Jason
Hi Jason, bought “The neatest little guide to Stock Market Investing” and I dare declare it’s the 1st book that I have managed to complete in a long while. Now I cannot wait to get started!
I hope you can help me clarify 1 point: when I use SMA/MACD/RSI to observe the trend, what time period (e.g. 5 days, 1mth, 3mth, 6mth) should I be looking at for any stock (e.g. MVV) to capture the trends accurate?
Many thanks!
Thank you!
For SMA, usually 50-day and 200-day work well. For MACD, the default and perfectly fine parameters to use are 12-, 26-, and 9-unit time periods (day, weeks, months, quarters). For RSI, a 14-unit period is usually best.
I should caution you that these and all such methods are unreliable. They’re accurately explained in the book and are easy to accurately use, but even if you get everything right the market can go against you. I recommend reading my newest book, The 3% Signal, to better understand why it’s probably not worth the effort of timing and better to just automate your long-term account with the signal while focusing your energy and ambition elsewhere in life.
Whichever path you choose, I wish you well.
Jason
Picked-up Jason’s “Stock Market Investing” at a bookstore on vacation recently. Completely changed my investing philosophy and made $7000 the first month. Was previously mostly in mutual funds but have a new confidence in common stocks. Highly recommend!
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Hi Jason,
In your book, 2013 edition, you mentioned that we can download a sampling of Exchange-Traded Funds on your website,
http://www.jasonkelly.com/resources.
Please send me the link as I cannot find it.
Thanks.
PL
Sorry about that, PL.
The link is buried in the text on this page, which you’ve now reminded me is in need of a sprucing up. We’ll be getting to it soon in the course of preparing the site for the rollout of The 3% Signal in February. The text listed above is:
ETF Trading Clusters. A tool to help trade around indexes based on the behavior of their 2x, 1x, -1x, and -2x vehicles. Free. Download the one-page PDF
All my best,
Jason
Hello Jason,
I have been reading your book: The Neatest Little Guide To Stock Market Investing. Its fantastic!
I am signing up for an RSP plan at work where I am allowed to take 6% of my paycheque and work will contribute 50% (will be 75% in December). My question is “Should I use the funds your mentioned in your book – UDPIX, UMPIX & MVV to hold my RSPs?” Note. This RSP is separate from other investments as work has specified which bank and account type I can use, the investments must be Mutual Funds. . .
I am looking at the funds and wondering two things:
The first: Can I use the same method of research that you mention in your book for these funds to see which of the three (or all of them) I should be putting in my RSP?
The second: Being 21, and looking for some stronger growth potential, how should I split the percentage rate of these three funds. Or do you have any suggestions for mutual funds that may be more suited for someone looking for stronger growth potential? How should I be splitting those in my RSP?
Any help would be fantastic!
Thanks,
Josh
I was one of the “lucky” ones to get in on the Facebook IPO…wink, wink.
Currently have 600 shares of FB. As I watch it fall to $31 per share, I wonder is the stock set for doom or will it be the next google?
In 2004, when google was 100 per share there where many naysayers, and now look at the success of google.
What are your thoughts on FB future successes and should investors hold or sell?
Definitely sell. The more we learn about Facebook, the less of a business it becomes. It will never catch Google in online advertising because it puts ads where nobody wants to see or click them. People go on Facebook to show photos of their cat and exchange quips with friends. They’re not “doing” anything. Google’s ads, by comparison, appear when people are searching for something and are interested in clicking both organic links and paid ads to find it.
I wrote earlier this year for subscribers that what Facebook and Google know about us are wildly different, and that Google’s knowledge is more valuable for advertising. Facebook knows your profile: who you are, where you live, the identity of your friends, what music you like, where you went on vacation, and so on. Google knows what you just typed in or did online in search of something. The latter is much more useful.
Knowing that I like Bob Dylan’s music is not as valuable as knowing that I just typed “Bob Dylan boxed set” into Google’s search. Just because I like Bob Dylan doesn’t mean I want a t-shirt with his photo on it. Facebook thinks that’s exactly what it means, and shows ads supposedly tied to me that way. Worthless. You know how you’ll know when I want a Bob Dylan t-shirt? By waiting for me to search on it and then watching what I click in response. This is why Facebook is no Google, and never will be. Just watch its upcoming earnings reports. I guarantee that they’ll confirm this.
If you own FB, sell it. If you don’t, avoid it or short it.
Dear Jason,
Re : “Helping people is good but it doesn’t always involve giving something away”.
Here in Italy we have a saying “Impara l’arte e metterla aparte” – which means ” Learn the art and put it on one side ”
The idea is to continually learn how to do many different things, even while you are employed, eg. from plumbing and plastering to painting and joinery, or from photography to web site design etc..
In this way, we always have a defense for harder times.
I think this is the best counsel which we should all give to ourselves.
Best Wishes & Tanti Saluti Ainslie
I am a new subscriber to the Kelly Letter. I did so through your Amazon link, but I am unable to login in as I don’t know my user ID or password. Please let me know what I’ve missed. Thanks
No letter today?? You alright Jason, is everything ok??
Renewed subscription this morning, need password. Letter has been great teaching method for a novice cowboy investor.
I did not receive the newsletter this morning and cannot login (new password for new month?). Can you please resend?
It works great from my typewriter. I love your writing, Jason. I own your Stock Market Investing book and just found your website.
Good stuff.
Thank you!
From iPad it does not work!!
Your link of podcast for iTunes subscription has not been working. Any solution or suggestion will be greatly appreciated.
Can you provide detail on what’s going wrong? It works on our computers.