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; in 2016, $1,983; in 2017, $2,043; and in 2018, $2,104. Mark also contributed $13,860 in new cash during the subprime mortgage crash, per the signal’s guidance. Notice the low expense ratios: IJR 0.07%, 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 to March 23, 2018 when converted by PIMCO to PTTAX) 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 0.95%, WAAEX 1.20%, ARTIX 1.18%, PTTAX 0.83%

Here’s how the three plans have performed, with all dividends reinvested:

Mark’s 3Sig DCA SPY DCA Medalists
End
2018
$363,168
3.3% in 2018
$322,683
2.2% in 2018
$247,925
4.0% in 2018
End
2017
$375,427
13.0% in 2017
$329,780
25.0% in 2017
$258,208
21.0% in 2017
End
2016
$332,091
25.2% in 2016
$263,874
15.7% in 2016
$213,424
9.5% 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 rebalanced quarterly with the Signal system. The Kelly Letter runs two leveraged Signal plan: 2x midcaps in 6Sig, and 3x the Nasdaq 100 in 9Sig. 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 system 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?”

Through the end of 2018, by price change only, it was no contest:

-42% IBM
+84% S&P 500

You can see their current prices here.

174 Comments

  1. Rahim Khataw
    Posted April 3, 2020 at 6:45 am | Permalink

    Hello Jason,

    When will you add the 2019 stats to the first table? Based on 2019 performance of SPY, i’m guessing DCA SPY would have closed the gap pretty much.

    Thanks, RK

    • Posted April 13, 2020 at 6:00 pm | Permalink

      Thanks for the nudge, Rahim.

      I’ve been so focused on the home page chart that I neglected this, then the corona crash arrived. I will get to it soon.

      Jason

      • Rahim Khataw
        Posted April 17, 2020 at 11:29 am | Permalink

        Looking forward to the update Jason. Over the recent years, it looks like the Tech Stocks in SPY are helping it outperform compared to IJR so I’m sure that gap is getting smaller now.

        Thanks, RK

      • Rahim Khataw
        Posted June 24, 2020 at 6:15 am | Permalink

        2019 results?

  2. Donald Miller
    Posted March 8, 2020 at 4:23 pm | Permalink

    I was wondering, do you think it would be best to have instead of 10 grand in Maximum Midcap and Value Averaging, 20 grand in just the Value Averaging plan, or would you still have the two as your core portfolio as stated in The Neatest Little Guide, on page 153. That’s all I have read up to, so I’m sorry if this is answered in the rest of the book. And just to be clear, Value Averaging is the same as the 3% signal right? And if so, would you say it would be best just to open an account with a brokerage firm with Fidelity or TD Ameritrade so you can trade IJR, or do you think that it would be okay to stay with Vanguard and trade the Small Cap ETF, VB? Also, I’ve loved the book so far, its definitely going to be one of my top references.

    • Posted March 9, 2020 at 6:44 pm | Permalink

      Thank you for the compliment, Donald!

      The 3% Signal is more developed than the value averaging plan in my stock book. I would recommend you read The 3% Signal book as well.

      I still like combining the two plans, as you read. In The Kelly Letter, there’s a third plan, too, a higher leveraged one than Maximum Midcap. The three plans work well together.

      You would do just fine running only 3Sig, but adding the others should boost performance in the long run. For example, in this current downturn, starting one of the more aggressive plans would provide more profit in the eventual recovery, for two reasons:

      1. Their prices are compressed more.

      2. Those compressed prices will rise faster in the recovery.

      I hope this helps, and wish you well. It’s hard to go wrong. Any combination of the plans will work.

      With best wishes,
      Jason

  3. Eilis Wu
    Posted January 10, 2020 at 12:46 pm | Permalink

    Hi Jason,
    I have joined Questrade after reading your book The 3% Signal. I live just north of Toronto in Canada. I was born in Ireland. Your name sounds Irish. What small cap & bond combination do you recommend for people who live in Canada.
    Thanks.. Éilis

  4. Rahim Khataw
    Posted January 7, 2020 at 7:33 am | Permalink

    Hello Jason,

    In the Canadian article you mentioned: Recently, US large-cap stocks have been performing better than medium- and small-cap stocks, but have not done as well over long time periods (which is why 3Sig works best with small-cap funds).

    Since 2009 to Present, SPY has been outperforming IJR. Using your numbers above for Mark 3 sig and DCA SPY, the average return from 2009 to 2018 is 18.71% for 3 Sig vs 20.31% for SPY. And we all know how SPY compared to IJR in 2019.

    Should investors look into running 3 Sig with SPY instead of IJR?

    It would be interesting to see your numbers with 3 Sig run with SPY in place of IJR from 2002 to present

    Thanks, RK

    • Posted January 15, 2020 at 5:44 pm | Permalink

      Hello RK,

      It’s true that small caps have been in a slump recently, but they’ve been through similar ones in the past and still boast a better long-term performance, as you mentioned.

      Yes, 3Sig can be run with the S&P 500 instead of the S&P 600. However, I would not recommend making the switch, especially now. Participating in reversion to the mean is essential to getting the long-term performance out of an index. The worst time to leave it in favor of another is usually when everybody is giving up on it for its performance. Everybody leaves, then it rebounds.

      So, while it’s possible to run 3Sig with SPY, I recommend sticking with IJR.

      Happy Sigging,
      Jason

      • Rahim Khataw
        Posted January 21, 2020 at 6:08 am | Permalink

        Hello Jason,

        Thank you for the follow up comment. You are correct and the power of 3Sig comes from the product, IJR, and the system 3Sig.

        Thanks, RK

  5. John C Fuerst
    Posted July 28, 2019 at 7:54 am | Permalink

    If I subscribe to The Kelly Letter, do you review how the 9Sig plan works vs the 3Sig plan? Where would this be if I sign up?

    • Posted July 29, 2019 at 12:05 pm | Permalink

      Thank you for your interest, John.

      Yes, all three Sig plans run in the letter — 3Sig, 6Sig, 9Sig — are explained in the user guide, which is always available on the subscriber site. There’s also a discussion forum, where I participate along with long-time subscribers, many of whom can answer questions as well as I can.

      I hope to see you!

      Jason

  6. Fred
    Posted April 27, 2019 at 12:43 pm | Permalink

    Interesting strategy.

    How do you take into account the capital you need to inject when the cash flow becomes negative into your return calculation?

    The money you make selling the surplus shares may not cover the shares that needs to be bought to get that 3%. I mean fresh money you put in is not to be considered “return.”

    When you look at the table in Appendix 3 of your book (The Neatest Little Guide to Stock Market Investing): Capital invested (i.e money that needs to come from your pocket) is actually $15,408 and you end up with $20,402. That is far, far from a 12% yearly return…

    Care to comment?

    • Posted April 30, 2019 at 2:18 pm | Permalink

      Thank you, Fred.

      If all buy signals are provided with full funding, then the growth rate of the stock fund will proceed at the pace of 3% per quarter. You’re right that in periods when the investor could not fully fund buy signals, the performance would fall back but generally still do better than following media voices advising the sale of stocks during such periods.

      It’s important to note that the entire plan (stock fund plus bond fund) was never intended to grow at a predictable pace. The only we can control is the stock fund, by rebalancing to the signal line each quarter, and it’s possible to lose control of that one in extreme periods. One way to address it is with a “bottom buying” account, as explained in my book, The 3% Signal. However, also as shown in the book, even an imperfect implementation of the plan comes out ahead of a full buy-and-hold of the S&P 500 in most time frames.

      For a more detailed look at how the 3% signal plan works with a regular inflow of monthly contributions, as is typical in retirement accounts, please refer to the details of Mark’s 3Sig plan on this page. For current performance of my letter’s 3Sig plan, along with its 6Sig and 9Sig plans, please see the charts on the home page.

  7. Giedrius
    Posted April 18, 2019 at 2:04 pm | Permalink

    What is the book value of Mark’s 3Sig account?

    • Posted April 26, 2019 at 11:27 am | Permalink

      Do you mean capital contributions? To get that, we’d have to add up his salary history as shown in the book and then the additional ones outlined above. The comparison above shows the same “book value” (via capital contributions) used in all three plans, for a level playing field.

  8. Linda
    Posted February 27, 2019 at 3:07 am | Permalink

    This failed wannabe-trader, 72, pensionless, hired a fee-for-service guy to make my portfolios manageable. It worked and I am happy with them, however, I am trying to get into decumulation mode in spite of my need for some excitement. From somewhere 3% sig popped up and I remembered your book was one of the few things I did not dump when I quit trading. Do you have any advice for a Canadian with limited cash who wants to try your 3% sig strategy? Buying the USD is painfully expensive…are there any Canadian vehicles worthy of your strategy? Also watched your YouTubes and would also like to know of any leveraged Canadian ETFs that might be used? Thanks Jason. Going to re-read your book now. Linda

    • Posted February 28, 2019 at 12:21 pm | Permalink

      Thank you for not dumping my book when you (wisely) moved on from trading.

      I don’t know of leveraged Canadian funds for running 6Sig and 9Sig, but this article should help with 3Sig.

      Happy Sigging,
      Jason

  9. Brandon
    Posted January 30, 2019 at 1:47 pm | Permalink

    Is the Maximum Midcap calculated using UMPIX or MVV?

    • Posted February 15, 2019 at 1:06 pm | Permalink

      UMPIX here, because it’s what was mentioned in the book. In The Kelly Letter, I use MVV for the 6Sig plan.

  10. Michael
    Posted January 29, 2019 at 3:14 am | Permalink

    How did the three plans perform in 2018?

  11. Edward
    Posted October 24, 2018 at 12:52 am | Permalink

    Bought your book but need your support.

  12. Dennis
    Posted May 19, 2018 at 10:07 pm | Permalink

    Hi Jason,
    I have been a Value Average investor since I bought your 2010 book in 2011. It helped me to retire early. I wanted to know if you had any thoughts regarding VA of Dividend ETFS like VYM, SCHD or DGRO? This would be for building future income from Dividends portfolio once I start withdrawing from my retirement in 10 years. At that point I want to only draw dividends .

    Thanks,
    Dennis

    • Posted May 22, 2018 at 11:17 pm | Permalink

      What great news, Dennis, and congratulations!

      There’s no reason you couldn’t value average a dividend ETF the same way 3Sig value averages small caps, but withdrawing only dividend proceeds would make the plan trickier.

      It’s probably best to value average quarterly for the next ten years, then hold in place since you’d be owning the fund(s) primarily for yield. It would enable you to focus on tracking your dividend flow only, and withdraw only from it, leaving the principal intact.

      I would still use the 3% quarterly growth goal during the VA years ahead.

      Jason

      • Dennis
        Posted May 24, 2018 at 3:11 pm | Permalink

        Thanks Jason! Also, when is your next book coming out? Keep ’em coming.

        Best Regards,
        Dennis

  13. Raja bilal
    Posted March 31, 2018 at 11:02 pm | Permalink

    Hi Jason,
    I’ve been reading your methodologies for investing, i’ve gone through just 900 pages and i feel investing right now. But i’m kinda confused how things will work out for me in a stock market like Pakistan.

    • Posted April 18, 2018 at 11:48 am | Permalink

      Hi Raja,

      The mathematics of investing work the same way anywhere, and my preferred strategies, the Sig system, rely on math alone.

      The PSX in Karachi lists 559 companies with a total market capitalization of about $85B. Any index funds tracking the whole PSX or a meaningful sub-group of it should be fine for the stock portion of your plan.

      Happy investing!

      Jason

  14. Vaqas
    Posted March 22, 2018 at 10:21 pm | Permalink

    Hi Jason

    How do you think a retiree proceed with signal investing? Should we reduce the movement percentage to allow investments from 9 sig to be converted to cash for use?

    • Posted April 18, 2018 at 11:38 am | Permalink

      Hi Vaqas,

      That’s one way. Another is to reduce the target allocation to stocks, as explained in The 3% Signal. The 9Sig plan produces so much volatility in the 3x stock fund that even a small allocation, such as 20%, can achieve meaningful growth. Many subscribers are running 9Sig at a base reset allocation below 60% stocks, which is what the letter runs.

      Jason

  15. Alex
    Posted March 13, 2018 at 5:53 am | Permalink

    Hi Jason,

    Of course I’ve been ready your book. One question popped to my mind. At the end of the chapter about your strategies you propose value averaging and Maximum Midcap.

    Both concepts make perfectly sense to me. However I was wondering if there is any good reason not to value average your the Maximum Midcap investment.

    I think the higher volatility requires more cash to keep the averaging strategy going. It’s also harder to come up with an respective 3% per quarter target. Is there anything I miss? What are your thoughts on this?

    Thank you so much, I highly appreciate your efforts.
    Alex

    • Posted March 19, 2018 at 7:03 pm | Permalink

      Hi Alex,

      Actually, there is such a strategy running in The Kelly Letter, called 6Sig, along with an even higher-powered one called 9Sig. The three Sig permutations work wonderfully together, each running just a stock fund for growth and a bond fund for safe storage of buying power. They are:

      3Sig
      1x small-cap fund and general bond fund

      6Sig
      2x mid-cap fund and general bond fund

      9Sig
      3x NDX fund and general bond fund

      The leverage introduced different base reset allocations and some rules for managing the greater volatility, but these are simple and do not interfere with the basic 3Sig plan explained in The 3% Signal.

      I’m glad my books are helping you!

      My best,
      Jason

      • Andras Molnar
        Posted May 30, 2018 at 8:15 pm | Permalink

        Hello Jason,

        I am interested in the 6Sig and 9Sig method. You mentioned they are in The Kelly Letter. If I subscribe to The Kelly Letter can I get older letters, which contains the 6Sig and 9Sig methods? Or is there any other way I can get the information?

        Regards,
        Andras

        • Posted May 31, 2018 at 4:46 pm | Permalink

          Yes, by all means, Andras!

          I’ll be sending a discount promotion to subscribe to the letter this morning, US time. Because you’re on my free list, you’ll receive the promotional code.

          I hope to welcome you to the letter soon.

          My best,
          Jason

  16. Josh Schachter
    Posted March 11, 2018 at 12:55 pm | Permalink

    Hi Jason – I am 90 pages into your booking and loving it. I think I understand the methodology and want to start using it asap (it takes me a long time to finish books due to my work schedule).

    What is my first step? Is there a checklist that exists somewhere? I trust your method but it’s a bit daunting to withdraw from my mutual fund account I’ve been contributing to and accruing.
    Thank you.

    • Posted March 19, 2018 at 7:05 pm | Permalink

      Hi Josh,

      Just to note, I emailed you directly a week ago and you should be all set.

      I hope you enjoy the rest of the book!

      Jason

      • Judy
        Posted September 6, 2018 at 9:22 pm | Permalink

        Hi Jason, I actually have the same question as Josh.

        After reading the book is there a checklist or set of steps?

        Thanks
        Judy

  17. Graham
    Posted February 2, 2018 at 5:58 pm | Permalink

    I’m really enjoying your book The Neatest Little Guide to Stock Market Investing. It’s truly changed my life in my outlook towards investing and my returns have never been better. I’ve been listening to you online everywhere I am considering the 3Sig and I can’t wait to get to that book.

    In the meantime, I had a question about VB and SAA (as I’m comparing these two).

    From the top of October 2007 to the bottom of March 2009, VB lost almost 60%. Since SAA for instance moves at 2X, it lost about 50% more, basically lost about 87.50% in value. In case this type of pullback occurs, but let’s say if a recession eventually occurred that caused VB to lose 70%, what then would happen with SAA? Let’s say if it didn’t, it just only lost about 55%, what would happen to the likes of TNA. Do they liquidate these at that point? Honest curiosity…

    • Posted February 6, 2018 at 10:57 am | Permalink

      Thank you for the compliments, Graham!

      No, the leveraged funds don’t actually go all the way to zero, but in an extended pullback they would get very close to it. Because the fund returns are calculated daily, the only way for a 3x fund to go to zero (for instance) would be if its target index fell more than 33% in a single session. The market has never come close to that. It’s theoretically possible, but hard to imagine in our era of circuit breakers.

      So, they almost certainly won’t just blink out of existence. Instead, they would keep declining severely on a daily basis to an increasingly small fractional price, the way you can continue dividing a number by 2 forever without reaching zero. For all practical purposes on a balance, however, a leveraged fund would reach a value of nothing eventually.

      This is why the best way to handle them is with a timed buying reaction. My plans run quarterly, for example. In an extended sell-off, more capital is not moved in more frequently than quarterly, allowing the price to continue compressing (or rebounding, we can never know) before moving in more capital. This is not perfect, but pretty good and the best way I know of handling the wide price swings of leveraged funds.

      Jason

      • Max
        Posted September 11, 2018 at 7:44 am | Permalink

        This is fantastic information ( also in this comment of yours https://jasonkelly.com/resources/strategies/#comment-265659 ), and exactly what I have been looking for after I discovered your signal system strategy and was not quite sure how to apply it with 3x leveraged funds in terms of initial/base capital allocation ratios, etc.

        I’m currently experimenting with your 9Sig strategy in a fund, which exactly experienced this scary scenario (going basically to zero), which you and Graham described above, since its inception, namely NUGT. The same would probably have applied to TQQQ if it had existed during the 2000 dot.com mania/bubble and one had invested in the fund at the very top of the market, see here: “Here is the hypothetical growth of $10,000 over the lifetime of QQQ, simulating 3x daily leverage. Make of it what you will.[…] 1999-03-10 $10000.00 […] 2008-12-31 $55.95 […] 2017-05-31 $3345.53” – https://www.reddit.com/r/investing/comments/6glsf8/longterm_investment_in_3x_leveraged_etfs_am_i/dirg3x2

        I have a $15,000 trading/investment account and decided to allocate about $6,000 (40%) into NUGT – my entry was about $12 for 500 shares – while keeping $9,000 in cash, instead of a bond fund, for extra stability/predictability to use for your 9Sig strategy.

        I have been thinking about rebalancing the account monthly with a 3% instead of quarterly 9% signal.

        This would increase commission fees, but since I’m in cash instead of a bond fund I save one commission per rebalancing, so I would have 12 annual commissions for rebalancing compared to 8 annual commissions with quarterly rebalancing both the bond and stock fund.

        I did a very short-term backtest (one year, Sept. 1 , 2017 NUGT at about $42 to Sept. 1, 2018 NUGT at about $13) of the monthly vs. quarterly strategy, and the monthly rebalancing strategy actually beat the quarterly one by about $300, before commissions, for that time period.

        Thanks so very much for the great information and wisdom you share with us and the world, Mr. Kelly.

        I highly appreciate it and you,

        Max

        • Posted October 9, 2018 at 4:39 pm | Permalink

          You’re welcome, Max.

          My own testing and real-world experience show that frequencies higher than quarterly produce no greater long-term performance. They produce more activity without benefit, so I recommend that you run my plans or plans based upon them at a quarterly frequency.

          Interestingly, slower frequencies, such as annually, work just as well over the long term, mathematically speaking. What derails them is the feeling by investors that they’ve abandoned their investments and need to do something. The quarterly pace achieves roughly the same performance while also tending the needs of investor emotions, scratching the itch to do something often enough to minimize or prevent meddling.

          My best wishes for you!

          Jason

  18. Kaleb Markey
    Posted January 5, 2018 at 12:23 am | Permalink

    How do you feel about BLV instead of BND for the bond side of the 3 sig plan?

    • Posted January 6, 2018 at 6:27 am | Permalink

      I prefer BND. If you want to use a different Vanguard bond ETF, go with BIV (intermediate-term). The purpose of the bond fund in my systems is to protect buying power capital while waiting to move it into the stock fund at opportune prices, with a little income as a secondary consideration. Total bond funds are best for this, with medium-term ones come in second-best. With others, you run too much rate risk.

  19. Kaleb Markey
    Posted December 22, 2017 at 8:45 am | Permalink

    When will you have a spreadsheet for the 9sig? Also when do you use the Spike Reset Trigger and the Buying Power Throttle? I’m having a hard time talking it through and understanding it so could you do a numerical example of when you’d use those rule?

    • Posted January 3, 2018 at 6:54 am | Permalink

      Hi Kaleb,

      I should have a 9Sig spreadsheet ready this quarter. The details of the 9Sig plan are explained in the Strategies section of the User Guide, and I’ll be improving that this quarter, too. From it:

      The spike reset rule works as follows:

      IF: The leveraged stock fund’s quarterly gain is 100% or more
      AND: The leveraged stock fund’s balance after the quarterly rebalance is between 60% and 100%
      AND: The plan is not in a 30 down no-sell period
      THEN: Reset the leveraged stock fund to a 60% allocation

      The 90% buying power throttle just means that no quarterly buy signal will be allowed to use more than 90% of the bond fund’s balance.

      These two parameters have improved the performance of 9Sig through past market fluctuations.

      Glad to have you, and happy new year!

      Jason

  20. Ken
    Posted December 15, 2017 at 4:06 am | Permalink

    Is it worth starting on 3sig if I’m looking to become a first-time home buyer in 6 months? I’m using a cash/mutual funds/and an S&P 500 index mix right now, with only 1/3 on the non-retirement side, and that mix is more like a 3-way split between those three investment types, which would mostly all be sold when needed. Should I run 3sig only on the retirement side?

    • Posted January 3, 2018 at 6:46 am | Permalink

      Hi Ken,

      No, I wouldn’t use 3Sig for a six-month time frame. I recommend just saving your buying money in a general bond fund, such as AGG, BND, or SCHZ. Those are the ones I use in the letter.

      Enjoy your new home!

      Jason

  21. Kaleb Markey
    Posted November 11, 2017 at 4:59 am | Permalink

    Is IJR still the best small cap index fund to use for 3sig? What about VFIIX for the bond portion?

    • Posted November 14, 2017 at 10:14 am | Permalink

      Yes, it’s still my favorite. VFIIX is fine for the bond fund, but the ones I use in the letter are AGG, BND, and SCHZ. Any low-cost small-cap index fund and low-cost general market bond index fund will work.

  22. Marty
    Posted October 9, 2017 at 5:03 am | Permalink

    I’m loving the book and I definitely see how it is a great, robust plan to most likely beat the market.

    However, I’ve noticed that in the book you almost exclusively focus on 2000-2013, which has two major crashes. Major crashes highly favor the 3sig approach as opposed to a buy and hold strategy.

    I would really like to see the data running 3sig on up to a 100 different cases throughout the 1900s, perhaps starting each case at the beginning of each year and seeing how it compares to buy and hold of the S&P500. Or even just running it starting in 2003 or 2009 to show how it compares to buy and hold or DCA.

    Have you crunched those numbers? Even just using the S&P500 and cash GE the S&P500 buy and hold or DCA would be very helpful to see.

    • Posted October 11, 2017 at 1:02 pm | Permalink

      Thank you, Marty.

      I stuck with the recent time frame in the book because it’s (A) one people are immediately familiar with, (B) contains those two scary crashes you mentioned which are the main reasons so many people are sidelined now and missing all the recent profit, and (C) it includes real data for funds that actually exist, as opposed to simulated data. Nothing wrong with simulated data, but I wanted to keep the history in the book immediately applicable.

      As for bigger lessons from history, back-testing of the past 50 years or so using indexes only shows that buying and holding with a lifetime’s worth of capital in the very beginning of the lifetime is the best approach.

      Too bad people who inherit their lifetime’s worth of money are the only ones who can do it, and they would probably end up panic-selling at the bottom of a crash anyway.

      For everybody else, there’s stock-picking (advocated by media and brokers), DCA, my Sig systems, and other automated approaches.

      Stock-picking always loses, so don’t do that.

      Then, it’s a toss-up between DCA and 3Sig (plus its 6Sig and 9Sig permutations) depending on the specific stock index used and time frame examined. But — and it’s a huge but — in real life 3Sig almost always beats DCA because the DCA comparisons depend on perfectly executed plans with 100% allocation to the stock indexes used. Nobody does this. Everybody pukes at the bottom and blows up their DCA plans that were begun in better times. The Sig systems are built to address real-life emotions of people through the ups and downs, and deal with them, as explained in the book.

      So, in raw numbers, longer time frames show 3Sig beating perfectly executed and fully allocated DCA in some time frames, but not all. When the impact of emotions is simulated (i.e. a percentage chance of making the wrong decision at key inflection points), then 3Sig always wins.

      Many analysts reject this means of comparison because it introduces subjective factors, but emotions are subjective, and real, and ignoring them costs a lot both in portfolio performance and life enjoyment.

      My best,
      Jason

  23. Jack Sam
    Posted June 7, 2017 at 6:49 pm | Permalink

    Hi Jason,

    Are you coming out with a book like 3Sig about 6Sig and/or 9Sig? Where is the best place to currently read more about these two strategies?

    Best,
    Jack

    • Posted July 3, 2017 at 4:41 pm | Permalink

      Hi Jack,

      I don’t have plans for such a book yet. The best place to read about the strategies is the Kelly Letter User Guide, but it’s on the subscriber site only. I should get some material on the free site, too, and will make a note to do so. Thank you for the interest.

      My best,
      Jason

  24. Marcial Navarro
    Posted May 12, 2017 at 9:29 am | Permalink

    Hi Jason,
    I was wondering what happens with TQQQ/9Sig during a market crash like 2002 and 2008, when the general market crashes like 80%, then with the 3x leverage the drop would be ~240%. Does the index go bankrupt and we lose our money, or does it reach a level where each share is worth pennies?
    The answer is probably simple but this has worried me today and haven’t been thinking straight lately, so I could sure use your clarification.
    Thanks in advance!

    • Posted May 15, 2017 at 6:48 pm | Permalink

      In the case of a prolonged bear market, leveraged funds would steadily work lower. They would not go to zero unless the market crashed enough in a single session to crater the fund that day, which it has never done. It could theoretically happen, though. However, in a long enough bear market, even if they didn’t go to zero, they would get very low.

      This is why it’s important to manage them carefully. My system includes a quarterly pace that prolongs buying power, a buying power throttle that does the same thing, automatic resets at allocations too high, and so on. The goal is to balance enough exposure to benefit in rising markets while going into bear markets with enough buying power to lock in at the bottom for the recovery to follow.

      So, funds invested in the leveraged ETFs during the drop would fall significantly, but the full cycle would probably see a net gain. We can’t say for sure in advance, but the system is built on market history and extensive simulation, instilling confidence.

  25. Chaz
    Posted March 14, 2017 at 12:18 pm | Permalink

    Jason,

    Thanks for everything you do! I have read the 3% signal and think it’s great. However, I have a question about the leveraged system, 9 sig in particular. From some research that I have done it looks as though a triple leverage S&P 500 etf would out preform a small cap 3x leverage. Is this true? Lastly, any funds in particular that you prefer for 9 sig?

    Thanks again!
    Chaz

    • Posted March 17, 2017 at 7:27 pm | Permalink

      Thank you, Chaz.

      Which 3x fund would do better depends entirely on the time frame. In most longer time frames, a small-cap fund will outperform the S&P 500, but for example in this year’s run-up the S&P and Dow have done better.

      Keep in mind that 9Sig doesn’t use a small-cap index, it uses the Nasdaq 100, which is even more volatile, and the system thrives on the higher highs and lower lows of greater volatility. In some time frames, however, the Nasdaq 100 will also trail other indexes. With its focus on technology, for instance, its vulnerable to a sector sell-off, such as the dot-com crash of 2000.

      All my best,
      Jason

  26. Dana Shute
    Posted February 24, 2017 at 6:38 am | Permalink

    Hi Jason,

    I came across this article on the web reviewing your 3% Signal methodology. The author is an experienced investor and engineer. In the article, he raises a few about matching performance as well as a few others. I have some of his same questions and concerns. Could you read the article (5 or 10 minutes long) and respond on website? I’ll post my question there as well. Since many people tend to look for reviews on the internet, I thought it might be well worth your time to answer the issues about performance and put the matter to rest.

    Here’s the link to the article:

    http://www.mymoneydesign.com/personal-finance-2/stocks/does-the-3-signal-investment-strategy-really-work/

    Thank you.

    Dana

  27. Todd Johnson
    Posted January 30, 2017 at 10:46 am | Permalink

    Jason,

    I just finished your The 3% Signal, and for additional background I’m just about finished with Michael Edelson’s Value Averaging (2008 edition). I really appreciate the humor and clarity in your book. I found the “z-val” quotes and observations particularly relevant. While I find the spurious advice offered by some z-vals very bothersome, I think dislike even more the pompous, jargon-filled pronouncements about obscure market characteristics and measures that fill the general news cycle. As you noted in your book, “experts” pronounce, but then never suggest or report any reaction to the information, as if the general public is supposed to already be “in the know.”

    If you have time, I wondered if you clarity a few points for me regarding periodic contributions to a 3Sig plan, something I’m about to implement in a Fidelity 403b plan. I presume that I would buy half bonds and half stocks with my paycheck deduction in each of the first two months of the quarter. However, I’m a little unsure of the details of handling the third month’s contribution. It makes sense to me that I would wait to buy anything at quarter’s end until I calculate the signal line. If the signal indicates that I would buy stock, it makes sense to me that I would fund the purchase first with the third month’s contribution’s allotted “stock” half, then with the month’s “bond” half and finally, if needed, with sale of bond shares. If purchasing the requisite stock leaves any of the month’s contribution unspent, it would presumably go into the bond fund, unless it would put the bond fund over 30% of the total investment, in which case the remaining contribution would also go to buying stock. If the signal indicates standing pat, I would still need to invest the month’s stock half in stock to actually reach the signal line. If the signal indicates a stock sale, I would put the whole month’s contribution into bonds, selling stock only as necessary to bring me down to the signal line. However. on some occasions, the signal line could indicate a sale, but since the signal is calculated partially on the third month’s uncommitted funds, I might actually need to buy some stock to end up at the desired signal line. In short, a “sell” signal could occasionally actually mean “buy less.”

    I’d appreciate any clarification you can provide about all of that. Also, in case it’s of value to your other readers, the Fidelity mutual funds I will use are FSSVX (indexed to the Russell 2000) and FSITX (indexed to Barclay’s US Aggregate Bond Market). These have fees of, respectively, 0.05% and 0.07% and require a $10K minimum investment There are exact alternatives available from Fidelity with $2500 initial investments, but the fees are correspondingly higher. This family of funds were formerly marketed as “Spartan” funds, but Fidelity has recently dropped that in favor of just call theming “indexed funds.”

    • Posted February 3, 2017 at 3:03 pm | Permalink

      Todd,

      All contributions go to the bond fund, all the time, no exceptions. You do not divide the money between the funds on the way in. The calculator or spreadsheet will account for half of their value when figuring the signal line.

      This calculation gets around the issue you described. If adding half the value of the contributions puts the signal line above the current balance, then you would be directed to buy more of the stock fund, thereby putting your contributions to work.

      If you’re nervous about starting the plan now, I suggest beginning with a half-allocation to your stock fund, and awaiting a future buy signal for the other half. That helps manage the emotion, which is all you need to worry about. The plan will be fine even if you start it at a full allocation right at a market peak. Doesn’t matter. The later quarterly signals will work everything out.

      Here’s a tip: There’s always a reason to be nervous, and it’s why most people miss out on years’ worth of market gains. Crashes are rare, nowhere near as common as media pretends. However you need to do it, begin your plan.

      Happy sigging,
      Jason

  28. Matt
    Posted December 31, 2016 at 8:34 am | Permalink

    Happy Holidays Jason!

    Just finished reading your “Neatest Little Guide…” and “3% Signal” and am really looking forward to getting the new year started with the 3% signal plan for my 403B.

    As I’ve begun familiarizing myself with my options (I believe I’m going to select VSIAX – Vanguard Small Cap Value Index Adm and VBTLX Vanguard Total Bond Market Index Adm, respectively), I’ve noticed that rather than numbers of shares provided, everything is listed as “units.”

    I’ve looked into this online and realize why its units vs. shares, but my main thought has been, how does this affect my ability to use your spreadsheet and 3% plan? Should I separately track the share price and each quarter divide that into the dollar amount for each fund to approximate the number of shares I hold? Or can I use the “unit” value as a surrogate?

    I apologize if this question has been asked, but I’d greatly appreciate the insight. Thank you so much for all of your help.

    Thanks and Happy Holidays,

    Matt

    • Posted January 4, 2017 at 8:01 am | Permalink

      Happy new year, Matt, and congrats on starting out right with your own 3Sig plan!

      Trading in units instead of shares doesn’t affect how the plan works. Both are just numbers.

      The typical reason for a plan using units instead of shares is that the provider is charging an extra fee for an outside fund, something along the lines of 30 basis points is common. There might also be a wrap fee. Watch for a change in units owned when you make no contributions or transfers.

      If that starts happening, you’ll need to recalculate how many of the new units you would have owned at your last quarterly action in order to accurately generate the current quarterly signal. It’s an extra step, but not such a big deal.

      If you’re ever curious to know how much you’re being charged in wrap fees, if any, run the change in units * the unit price, multiply by 12, then divide the result by your balance. This will tell you the annual wrap fee. I’ve seen them as high as 0.75%.

      Go get ’em,
      Jason

  29. Kevin
    Posted December 25, 2016 at 1:53 am | Permalink

    The book was a great read.The under-performance of DCA Medalists was eye opening.
    I was wondering why you chose DCA SPY as a point of comparison instead of using DCA IJR? Given the higher overall performance of IJR over SPY, it appears to me that DCA IJR could do even better than 3Sig.

    Kevin

    • Posted December 29, 2016 at 4:05 pm | Permalink

      Thank you, Kevin!

      I wanted to emphasize that the signal system handily beats the market benchmarks most people use. In some time frames, DCA IJR and lump-sum investing in IJR will beat 3Sig — if they are run perfectly, which they almost never are.

      Remember from the book that one of the most powerful features of the 3Sig plan is how it manages our emotions. Left to their own thinking, most investors bail out of DCA and lump-sum plans at the very bottom. In 3Sig, that won’t happen.

      Even when DCA and lump-sum investing are run perfectly in IJR, 3Sig beats them in most time frames.

      Thank you, again, and happy new year!

      Jason

  30. Hugo
    Posted September 25, 2016 at 6:33 am | Permalink

    Hi Jason Kelly,

    I’ve read your book and I’m happy that I did. It simplified what for me seemed complicate.
    I have however a variable that made me wonder if 3sig would still be the strongest strategy comparing to other possible strategies. My country does not have the equivalent to US-IRA or 401k accounts and taxes 28% from the gains (so each time I need to transfer balance either from IJR to VFIIX and vice-versa I would be taxed on the differences between the buy and sell costs of the shares).

    What strategy or what could be done in order to minimize these taxes?

    Thank you very much for your attention and I apologize if this question has already been answered before.

    Best regards,
    Hugo

    • Posted September 27, 2016 at 3:31 pm | Permalink

      I’m happy to hear from you, Hugo.

      The plan works best in a tax-advantaged account so that quarterly selling causes no tax consequences. However, it can still work in a taxable account.

      The best way to proceed is to keep track of the shares you bought and then sell ones held for more than a year to limit the tax bite to the long-term rate. I’m not sure if it works this same way in your country, but in the US the shares sold should be ones held for more than a year.

      Also, keep in mind that a plan receiving regular contributions of a decent size sells fairly rarely. The 3% quarterly growth target plus contributions sets a high enough bar that selling is infrequent and usually small in size. This, too, will limit the tax friction.

      I hope this helps, and thank you for the kind words.

      All my best,
      Jason

  31. Elma
    Posted July 3, 2016 at 9:51 pm | Permalink

    Hi,
    I’ve read the 3%sig and was wondering which Bond ca be used in Germany?
    Thanks and all the best
    Elma

    • Posted July 13, 2016 at 12:18 pm | Permalink

      Hi Elma,

      Any low-expense medium-term or total market bond fund will work. If you provide the ones available in your account, including symbol and expense ratio, I can help you select the best one.

      Jason

      • elma
        Posted July 14, 2016 at 8:25 pm | Permalink

        Hi Jason,
        thanks for your advice.
        my broker offers me a lot of bonds. thats why its “so confusing” 🙂
        e.g.
        “ISHARES EURO CORPORATE BOND LARGE CAP UCITS ETF” – WKN:778928 (Total Expense Ratio* 0,20%)
        “ISHARES BARCLAYS CAPITAL EURO GOVERNMENT BOND 1-3” – WKN:A0J205 (Total Expense Ratio* 0,20%)
        “Allianz Rentenfonds” – WKN:847140 (Total Expense Ratio* 1,01%)
        “DWS Euro Bond” – WKN: 972114 (Total Expense Ratio* 0,80%)
        just to name a view.

        Thanks a lot and best wishes,
        Elma
        Now

        • Alex
          Posted July 15, 2016 at 6:24 am | Permalink

          Hi Elma,

          I, for example, live in Germany, too, and I chose Schwab U.S. Small-Cap ETF (SCHA) and Vanguard Total Bond Market ETF (BND).
          They have both very little expense ratios (0.08% each) and are available at comdirect in my case.

          Best,

          Alex

          • elma
            Posted July 19, 2016 at 4:12 pm | Permalink

            Hi Alex,
            thanks a lot. i will check both of them. any reason you choose us small cap instead of a german index?

            elma

            • Alex
              Posted August 7, 2016 at 12:24 am | Permalink

              Hi Elma,

              I’ve chosen U.S. small-caps because I expect more of the U.S. market than of the German market over the long run.

              Jason, Elma, and everyone who wants to add their opinion:

              There are two U.S. small-cap ETFs with very low expense ratios.

              SCHA (Schwab US Small-Cap ETF)
              and
              VBR (Vanguard Small-Cap Value ETF)

              VBR sells at nearly twice as SCHA, but offers a dividen yield of 2.34% (VBR’s dividend yield) instead of 1.40% (SCHA’s dividend yield).

              Do you think it’s better, over time, to run 3Sig with the cheaper ETF (market price, not expense ratio, which is nearly the same) of which you can hold more pieces in your portfolio, or with the more expensive one, of which you can hold less pieces, but which pays higher dividends that could compound stronger over time?

              Best,

              Alex

  32. Steven
    Posted June 28, 2016 at 7:44 pm | Permalink

    I’ve just finished reading The 3% Signal and I feel like I’ve emerged from the fog of trying to make sense of the clamoring, contradictory z-vals. Thank goodness I can now ignore all that noise! I’ve just become eligible to invest in my company’s 401k. I am happy to see a small cap index fund among the offerings. Which of these bond funds would be more suitable to run 3sig, VBTLX Total Bond Market Index or VBIRX Short Term Bond Index? Thank you for your great work!

    • Posted July 2, 2016 at 3:02 pm | Permalink

      Great, Steven!

      Yes, welcome to the better way to invest. Makes you wonder how so many millions can keep tuning into the general commentary, doesn’t it? I’m glad you found 3Sig.

      As for which bond fund: VBTLX. It’s cheaper, yields more, and offers a performance profile that works well with 3Sig’s quarterly moves. Your 401(k) and your future self will thank you for starting the plan.

      Wishing you well,
      Jason

  33. 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

  34. 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.

  35. 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 🙂

  36. 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

  37. 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

  38. 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

  39. 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.

  40. A Jaroszysnki
    Posted November 19, 2015 at 9:07 am | Permalink

    Jason,
    I bought your book a while back, but had no money to invest back then! I used to receive your newsletter as well. I am quite new to investment in stock markets but consider I understand the theory quite well…. not so much the practicalities. Now I have some money after a few years hard working and don’t trust financial advisors….
    I have the following concern;
    I will be investing 10,000USD on an ETF (IJR) @ 131USD/share, my cost for transaction is 15USD (what my online broker offers), which is 0.15% for this investment. Lets assume that in 3 months the price stays the same @ 131USD/share. At this point I go for a 3% share equivalent purchase (262USD for 2No. shares as 300USD buys me 2.29 No. shares which I can not buy) with a again a charge of also 15USD the transaction (in this case it is a 5.7%! of what is invested) it seems an awful lot to me to be loosing on every transaction…. the economies of scale do not help here, is this normal?
    What if I want to start with a parallel investment of 1,000USD only for the same fund? The costs are just proportionally outrageous. Does the Value Averaging you explain in your book not applicable to such small investments? Having to buy/sell 1No. share is a 13% in relative magnitude.
    Is there a minimum amount you would recommend to invest as a starter?
    I hope I make some sense…
    Thanks
    Alex

    • Posted December 3, 2015 at 2:40 pm | Permalink

      I recommend moving your account to one of the brokers trading ETFs for free. The ones that work well with 3Sig, with zero transaction costs, are:

      AGG and IJR at Fidelity
      SCHA and SCHZ at Schwab
      AGG and IJR at TDAmeritrade
      BND and VB at Vanguard

  41. Nancy Koehler
    Posted October 17, 2015 at 8:43 pm | Permalink

    I am already retired and starting to use your strategies within my IRA. Any reason I wouldn’t do the same with Fidelity taxable account? Appreciate any guidance, Nancy

    Thank you!

    • Posted October 21, 2015 at 11:47 am | Permalink

      Hi Nancy,

      The only issue with 3Sig in a taxable account is that quarterly sell signals can create taxable consequences that you don’t need to consider in a tax-advantage account. Still, it’s pretty easy to restrict sales to shares held longer than one year to avoid short-term capital gains taxes. For more on this, see “Tax Considerations” on page 168 of “The 3% Signal.” One big takeaway is that 3Sig is likely to do better than whatever else you’re trying in your taxable accounts, and the performance difference is probably high enough to make it worth whatever tax consequences arise. About the only exception to this that I can think of is a person who buys and diligently, relentlessly holds an index or portfolio of stable stocks without ever selling — and I have yet to meet that person.

      Best wishes,
      Jason

  42. Luis
    Posted September 19, 2015 at 5:18 am | Permalink

    Hi,

    Currently is there any couple or individual better than IJR and VFIIX?

    Thank you!

    Luis

    • Posted September 25, 2015 at 1:37 pm | Permalink

      There are many alternatives that work. For example, a good pairing for the plan at Schwab is SCHA and SCHZ. At Fidelity, IJR and AGG. At Vanguard, VB and BND.

      • Kat
        Posted January 4, 2016 at 2:41 pm | Permalink

        How do you work out the pairings? Any suggestions for pairing VISGX?

  43. Sunny K
    Posted September 13, 2015 at 3:19 pm | Permalink

    Hi Jason!!

    I am reading through The Neatest Little Guide for the second time now. I am learning a bunch, thanks for the great information.

    I have a question about the Maximum Midcap (UMPIX or MVV) strategy. I think I understand how it works, it doubles the DAILY returns of a the S&P MidCap 400 index. I’ve tracked the returns on Yahoo finance and it appears that a share of UMPIX/MVV increased from a low of $7.05 in March 2009 to a peak of $83.26 in June 2015. That’s an amazing return!!

    However, a lot of what I’m reading on other websites highly discourages holding leveraged ETFs/Mutual Funds for long periods of time and that they are only suited for sophisticated traders. This differs from the advice provided in your book.

    I guess I just don’t fully understand why you would NOT hold these for long periods of time because of the massive increase in share price that I mentioned above.

    Can you please provide some clarity on this? Maybe I have it completely wrong.

    Thanks

    Sunny

    • Posted September 25, 2015 at 1:39 pm | Permalink

      Hi Sunny,

      Articles saying that leveraged funds don’t work over long time periods are just wrong, 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:

      https://jasonkelly.com/resources/strategies/#smi

      See what I mean?

      Best wishes,

      Jason

  44. Ivan Krizan
    Posted August 5, 2015 at 12:20 pm | Permalink

    I am a rising freshman at UNCC and am new to investing. I will be setting up my portfolio using your 3 sig plan before I go off to school August 22.

    • Posted August 13, 2015 at 6:47 pm | Permalink

      Good for you, Ivan! Starting young and running such a solid plan will all but guarantee a secure financial future for you and your family.

      Best wishes,
      Jason

  45. Christian K.
    Posted June 24, 2015 at 7:31 pm | Permalink

    Hey Jason – Fantastic book. I’m starting your 3% sig plan in my junior year in college. In short, I’m a complete noobie.

    Couple of Questions:
    1. What alternatives do we have to Bond ETFs and why do you recommend Bond ETFs over other fixed income vehicles?

    2. Do we wait for a buy signal before purchasing shares in a small blend ETF?

    3. If we were to use something other than a small blend ETF on the stock side of 3sig, what other alternatives do we have and why?

    Thanks so much and I look forward to meeting you some day!

    – Christian Kelly

    • Posted July 10, 2015 at 10:52 am | Permalink

      Thank you, Christian, and good for you to get started so early in life. The future you will thank the current you! Answers:

      1. Just go with bond ETFs as thoroughly explained in the book. Medium-term and total bond market funds are best.

      2. Yes, you await a buy signal no matter what growth fund you’re using.

      3. If you don’t have access to a small-cap fund for the growth side, such as IJR, then go with whatever stock index fund is available to you, maybe a large-cap fund such as an S&P 500 index fund. By the way, don’t use a blended fund. Go with a pure small-cap index fund. Good ETFs for 3Sig include: SCHA, VB, and IJR.

      Go get ’em,
      Jason

  46. James
    Posted June 13, 2015 at 8:51 am | Permalink

    I just ordered your book and am very interested!
    I was wondering if it’s possible that a one percent line evaluated monthly might possibly give even better results.
    What do you think?
    Thanks,
    James

    • James
      Posted June 15, 2015 at 3:56 pm | Permalink

      Never mind, Jason.
      Just read your book and understand why quarterly is better.
      Thank you for your book.
      – James

      • Posted July 10, 2015 at 10:31 am | Permalink

        Oops, I already replied! I’m happy you found the answer on your own, and maybe my reply will help others wondering the same thing.

        You’re most welcome for the book.

        Jason

    • Posted July 10, 2015 at 10:29 am | Permalink

      Thank you, James!

      No, one percent per month does not work better. Please review “The Outperformance Sweet Spot” beginning on p. 55. Also, from “Quarterly Time Frame” beginning on p. 60, excerpt from p. 62:

      “This quarterly schedule is just right. It gives the market three full months of moving around before we rebalance back to target. Three months is enough time for a lot of up and down to happen, for trends to get underway or wrap up. A monthly schedule tends to interrupt cycles. More important, historical testing of the plan shows that frequencies higher than quarterly increase activity without increasing performance. You’ll buy more and sell more, but won’t make more. Our aim is to maximize profits while minimizing activity, and a quarterly pace achieves this aim.”

      Happy reading!

      Jason

  47. Paul
    Posted May 29, 2015 at 12:43 am | Permalink

    Hi Jason,

    I have both your books and they’ve helped me come up with a solid plan to make money and grow my portfolio. As I’m sure many people do, I start thinking about tweaking things to get a little more return. Hopefully, for the better. I’ve been debating myself over the possibility of the signal working with the low 5. Would this just be too watered down to work in a taxable account?

    • Posted May 29, 2015 at 7:16 am | Permalink

      I assume you mean the Dow Low 5, and it could be run as a 3Sig permutation. It would be a little more work because you’d have five stocks and one bond fund, and would need to determine for each stock whether it grew 3% in a quarter and should be bought or sold. My work shows that this approach would not be worth the effort; that the simple two-fund approach is best. However, there’s no harm trying other permutations and the Dow Low 5 is a legitimate screening portfolio. As with all 3Sig plans, a tax-advantaged account would be best.

  48. Kalor moore
    Posted April 21, 2015 at 2:11 am | Permalink

    So in your book you recomend doing your buying/selling/rebalancing quarterly in order to not rack up extra fees that would diminish your returns. If you have the ability to trade the ETFs you are using, so no fees would rack up, does it make more sense to do so on a monthly time frame? Or, even more extreme for that matter, weekly or daily?

    • Posted April 21, 2015 at 7:01 pm | Permalink

      No.

      Reducing fees is not the only advantage of trading on a quarterly schedule. From page 62 of The 3% Signal, within the “Quarterly Time Frame” section that begins on page 60: “More important, historical testing of the plan shows that frequencies higher than quarterly ones increase activity without increasing performance. You’ll buy more and sell more, but you won’t make more. Our aim is to maximize profits while minimizing activity, and a quarterly pace achieves this aim.”

      There’s more, but that’s the gist. I suggest re-reading that section of the book, then you can enjoy your free trading capability while also relaxing along the way!

  49. Ace
    Posted April 14, 2015 at 1:06 pm | Permalink

    Hi Mr. Kelly.

    I was looking at IJR and MVV. They look very similar even when looking back for the past 5 years or so, and it’s confusing me greatly. In your Neatest Little Guide to Stock Market Investing 5th edition book, you mentioned (on p. 121) that the advantage of IJR is that it is cheap, reasonably volatile because it is based around small caps, and has a high growth potential. This is why you designated it as a good stock for Value Averaging. Despite this, I see that MVV appears to be nearly identical but even cheaper (even though it is a midcap 400 stock). However, you recommended MVV for leverage as opposed to value averaging (you designated IJR for that). I am rather confused by this. Is it not possible that MVV can be used for Value Averaging? It seems to be a better candidate. Perhaps I am missing something?

    • Posted April 16, 2015 at 10:42 am | Permalink

      Hi Ace,

      Their expense ratios aren’t close at all. MVV charges 0.95% while IJR charges only 0.14%. Their performance profiles have been different, too. Over the past five years, MVV returned 189% vs 83% for IJR.

      As for whether MVV can work in a value averaging plan, yes. I use it in a plan similar to The 3% Signal in my letter. The target allocation needs to change for a higher percentage in bonds for greater buying power in steeper downturns, and the quarterly growth target needs to move higher to account for the leverage, but other than that it runs in basically the same manner. I have higher confidence in the base-case 3Sig plan using IJR, but the MVV permutation is good — and more exciting.

      Jason

      • Ace
        Posted April 19, 2015 at 7:36 am | Permalink

        Darn. I missed the difference in expense ratios and returns. I was confused since their charts looked almost identical. Thank you for the clarification.

        I suppose it also makes a lot more sense to not use MVV for value averaging, since it grows more rapidly. A value averaging plan would just result in the selling of many shares as the price keeps increasing, or, as you mentioned, I would need to increase the quarterly growth target. It also would sort of defeat the purpose of a strong core portfolio strategy of steady growth if I added elements of risk to it. If I wanted more returns, I should just invest in MVV and hold it.

        Please let me know if my understanding is incorrect. I am still a little confused about the “higher percentage in bonds for greater buying power in steeper downturns” part though. The 3% Signal is still in the mail, so maybe I will understand more when I finish reading it.

        Regards,
        Ace

        • Posted April 20, 2015 at 5:28 pm | Permalink

          Yes, the book will make the base-case 3 percent signal plan crystal clear. Once you have that established, it’s easier to consider the pros and cons of various permutations. It’s not quite accurate to say that if you want more returns you should just hold MVV. It works better to harness its greater volatility with an allocation and signal method that are prepared for it. Just buying and holding leveraged ETFs is not the best practice, though it works better over most long periods than the mainstream financial media has indicated.

          We’re getting a little ahead of ourselves. Please do read the book, and then check back in if you have further questions or something to add to the MVV permutation.

          Happy reading!

          • Ace
            Posted April 21, 2015 at 10:16 am | Permalink

            I really appreciate you taking the time to answer my questions, Mr. Kelly. I will begin reading the book as soon as possible.

            On a side note, how do you feel about something like PJP?

            Its expense ratio is lower than MVV’s, and its growth potential is tremendous. I am also fascinated by the fact that it was minimally affected by the 2008 recession. Perhaps the focus is more narrow, but I am curious.

  50. Eric
    Posted April 3, 2015 at 12:35 am | Permalink

    I enjoyed reading “The 3% Signal”. The strategy does make sense, but I’m worried that the strategy isn’t back tested for an extended period of time. Do you think the strategy beat DCA the SPY from 2000-2014 because there were two large bear markets in that period and there was an allocation of bonds in the 3% signal? I might of missed an explanation in the book, when applying the strategy to a 401k and contributions are made monthly and you are starting with a low balance in a 401k, do you see if there is a 3% gain/loss from the starting balance of the stock fund in that quarter and ignore contributions made?

    • Posted April 11, 2015 at 9:06 am | Permalink

      Eric,

      The strategy presented in the book uses the recent time frame because the funds used in it actually existed in the entire 12.5-year window. I wanted to use real numbers delivered by funds people could have owned in the period examined, not ones inferred by the behavior of their underlying indexes. Further backtesting of the raw indexes is what underpins the plan, however, so I should probably show those results on this page one of these days.

      Jason

  51. Carlos
    Posted March 21, 2015 at 11:51 pm | Permalink

    Hi Jason, congratulations. The 3-Sig book is fantastic. I had read The …Little Guide (2013 ed) and it is a great reading too. It already shows Valuon e Averaging, so 3-Sig builds smoothly from that book.
    I have a couple of questions, regarding implementing the 3-Sig strategy.
    For those like me, whose investing can´t be protected from taxes in a retirement account: I am not a US or Canadian resident. I am investing in the Australian market, which works pretty much the same as those above.

    But, as I am living abroad, I can´t setup a retirement account. THEREFORE, I pay taxes on Capital Gain, and Dividends (although in Australia they are franked).

    In such a case, which I believe may apply to some of your readers:

    – what would be the effect of trading less ? E.g. if at some quarter, IJR has grown more than 3% and the logical decision would be to sell, therefore incurring in CGT, would it be more efficient just to pass and carry that excess growth over to the next Quarter?
    – I guess this could be considered, at least when the Portfolio is just starting and fees would be comparatively large (example, in Australia, each trade costs 19.95 AUD, and in Europe they can cost up to 35 Euros)

    And my last question, with apologies for such a long comment:
    Would other types of ETF be stable enough to use instead of the bonds? For example a Property Index ETF, or a TOTAL MARKET ETF?
    Rationale for this question: I understand both propositions are not as stable as Bonds ETF. But, they grow more and pay less Dividends.
    In a case (like mine, and probably many of your readers) I guess it is preferable not to have too much money paid with dividends, given that Taxes will apply to dividends too. Maybe an instrument that shows more growth and pay little of that growth as dividends could be considered, when one is using accounts that are not tax-sheltered.

    Thanks again, and all the best
    Carlos

    • Posted March 30, 2015 at 11:28 am | Permalink

      Thank you, Carlos!

      I’ll think about this and post some thoughts soon.

      Jason

  52. Jeffrey Wright
    Posted March 21, 2015 at 3:32 am | Permalink

    Great book and concept! Has the author given thought to what percentage equities vs bonds someone in their mid to late sixties (in retirement) might use versus the recommended 80/20 stock/bond target allocation? Perhaps something such as 60/40? Thanks.

    • Posted March 21, 2015 at 9:19 am | Permalink

      A lot of thought! Your best bet is to follow the 3Sig target allocation schedule in Table 33 on page 153.

      For most of a person’s working life, the stock/bond target allocation is 80/20. It begins ramping down the stock side 10 years away from retirement. At retirement, it’s 50/50, and continues becoming more conservative until reaching 20/80 15 years into retirement. I suggest rereading that section, “Adjusting Your Bond Balance as You Grow Older,” beginning on page 152.

  53. Jim
    Posted February 27, 2015 at 10:48 am | Permalink

    Hi Jason… With regards to “Mark’s 3Sig” progress between 2000 and 2014 charted above, do you have a calculation of how much cash came in and out of the plan during that period? In other words, how much cash was needed for purchases and how much was received from fund sales, or the net effect during that period? Thanks, Jason … Jim

    • Posted February 27, 2015 at 2:18 pm | Permalink

      Hi Jim,

      Yes, it’s all in the book and also in the single-page printable version of Mark’s plan on the 3Sig Tools page. The total new cash he put into the plan during the time frame was $13,859. Details of quarterly sales are too numerous to list here, but all activity is summarized in Appendix 1 of the book and in the printable plan.

      Happy fine-toothed combing!

      Jason

      • Jim
        Posted February 28, 2015 at 1:47 am | Permalink

        Thanks, Jason! … Jim

  54. James S.
    Posted February 25, 2015 at 12:09 pm | Permalink

    Jason,

    I have read both of your previous books (The Neatest Guide to Stock Market Investing) and looked forward to getting The 3% Signal. I received it today on my Kindle and haven’t been able to put it down. I am planning on retiring from my job this year and unfortunately haven’t built up much of a nest egg. I am 56 and still have a lot of good years left to work on that and your 3% Signal technique really gets me excited. I am looking forward to getting it started and rolling over my current 401(k) into an IRA using the 3Sig method.

    Is the Tier 2 strategy basically the same as the 3% only at 6%? I have been following your methods for a while and noticed the Tier 2 change.

    Thank you for the expertise that you share to help others with their investing needs. Keep up the good work.

    P.S. We have friends in Colorado and love going to spend time with them. What a beautiful state. Next time we are there, will have to drop by the coffee shop. Is it still there?

    James S.
    Oklahoma

    • Posted February 26, 2015 at 1:36 pm | Permalink

      James,

      Thank you for the kind words! 3Sig will serve you well in the decades ahead. The book includes a schedule for adjusting the allocation as you near and then enter retirement. It’s a breeze to manage.

      As for Tier 2, yes, the 2x leverage also doubles the quarterly growth target, and it changes the target allocation from 80/20 growth/safety to 50/50 growth/safety. I’m also researching a third permutation for Tier 3 that will use higher leverage with a higher frequency and different allocation target. The higher leverage becomes more complicated because it also needs a control on the total amount of capital that the highly leveraged vehicle is allowed to pull in. If this isn’t controlled, it’s possible for a tailspin to suck up all the capital around a highly leveraged vehicle, which is emotionally hard for people to withstand. Note that this additional research does not change my recommendation of the base-case 3Sig as the best practice. It’s the only permutation to which I assign 100% confidence.

      Colorado is a beautiful state, and the longer I live the more grateful I am to have spent my boyhood in its Rocky Mountains. You’ll be please to know that Red Frog Coffee is, indeed, still operating — I daresay thriving! For upcoming events, visit its website at redfrogcoffee.com. For directions, here it is on Google Maps.

      Best wishes,
      Jason

      • Joe
        Posted April 1, 2015 at 4:57 am | Permalink

        Jason,

        Hope all is well? I’ve read both the 2013 edition of The Neatest Guide as well as your new 3% Sig….really enjoyed them both! I plan to use the base 3%sig in my 401K (Tier 1) and Max MidCap (Tier 2) in my IRA/individual accounts. I also want to incorporate some Tier 3 type investments such as 3x Lev ETFs as well as individual stocks. Do you have a recommended percentage you think should be allocated to of my overall portfolio for each Tier? Thanks much!

        Joe

  55. simmy
    Posted November 6, 2014 at 2:56 pm | Permalink

    Few years back a friend of mine had given me your book The Neatest Guide to Stock Market Investing. I loved the book, well written. I am not sure what is MVV and IJR? How do I get more information on that? Please let me know.

  56. Jack R
    Posted February 5, 2014 at 3:23 pm | Permalink

    Hi Jason,

    Great work ! I do have a couple quick questions for you. I noticed you are in bonds in the 2014 update. How much would you suggest to put into bonds vs cash reserves ?

    Assuming I have extra money to invest (in addition to reserves) to increase my money at work, how and when would you suggest adding to the ETF ?

  57. Adam
    Posted January 28, 2014 at 6:13 am | Permalink

    Hello Jason,

    I have read the 2010 edition of your book, and reread some of the more pertinent sections and was excited to delve deeper into value averaging (VA). It seems as though there is a large debate as to the superiority of VA. The most pressing concern is the cash side account. Although VA does consistently give higher internal rate of return (IRR) with no difference in volatility, the total investment return is not superior. The IRR is only measuring the invested portion of money. There is a nice description of the other side of this debate on this blog.

    http://www.michaeljamesonmoney.com/2012/10/value-averaging-doesnt-work.html

    I think VA is one step away from being a truly great investing strategy, but it is not quite there. For comparison sake, if you had taken a buy and hold strategy with the above scenario you would have seen a substantially greater profit.

    I look forward to your thoughts on this.

    Best,

    Adam

    • Posted January 29, 2014 at 4:40 pm | Permalink

      Thank you for the discussion point, Adam.

      Part of the issue is that my stock book provides only an overview of the plan. Realizing this, I’m currently working on a book dedicated to the plan, to be called The 3% Signal. It will be published next year.

      The objections raised in the article you cited are not new, and are easily overcome. First, the side account need not be in go-nowhere cash. Keeping the allocation in bonds greatly improves the performance of the plan while retaining most of the safety appeal of cash. Second, a rebalance based on a trigger that then waits for the next buy signal ends up taking advantage of market underperformance with lump sums of cash. Most such rebalancings work out nicely. Over time, the aggregate benefit is significant. Third, adding a modification to The 3% Signal that leaves it fully invested for several sell signals following extreme market sell-offs enables it to benefit from the big recovery that usually ensues.

      This latter part is the only reason that dollar-cost averaging comparisons do well. They always assume the investor will actually continue the plan through rough markets like the one in 2008, and that the DCA is run entirely in a pure stock fund. Neither of this is true in most real-life cases. Most investors diversify their DCA plans across several funds, thereby muting the benefit of the stock fund used in the head-to-head academic comparisons. On top of this, most investors bail out on DCA plans at the very moment they should be ramping them up in bad markets.

      The 3% Signal provides reactive rebalancing guidance through the market, which enables investors to stick with a plan instead of feeling victimized by circumstances. They see it automatically buying weakness and selling strength, know that it’s doing so again in the rough market, and stick with it in a way that ends up focusing most of their capital in the growth fund — much more than they would do in a DCA plan.

      DCA is a good investing technique, without a doubt. I’m a fan of it. However, The 3% Signal beats it.

      Jason

      • Adam
        Posted February 1, 2014 at 5:26 am | Permalink

        Thanks for the swift reply, Jason.

        I am really looking forward to your new book! I received the email you just sent out promoting the Kelly Letter and showing a bit of the discussion you have with subscribers. I am infatuated with compounding interest and do agree with how you seem to be tweaking the plan. Good luck and I’ll let you know how your concepts are working for me in the future.

        Adam

  58. Carlos
    Posted October 7, 2013 at 4:00 pm | Permalink

    Hi Jason. I am writing about 3 topics.
    (1) I have bought and read the 2010 and 2013 TNLGs, which are excellent. Thanks for a brilliant job. When are you publishing the book on VA?
    (2) I am investing in the Australian stock exchange, where IJR is cross-listed. I am interested in implementing the VA technique. Your other techniques are harder to implement here, as there are no leveraged ETFs.
    My question is: This semester IJR has grown very well. Would it be sensible to buy it? It has reached the 105 AUD mark, with a 52-week range 69,110 – 110,350. Do you think this can keep growing?
    (3) Part of my portfolio includes a Bank (ANZ.AX), two Energy companies (BHP.AX and WPL.AX) and 2 ETFs: IXJ.AX (health care) and VHY.AX (high dividend). I have been thinking of getting rid of the stocks and invest that money of the 3 ETFs: the 2 I already have, plus IJR. Do you think this would be a fine move ?

    Thank you very much, Carlos

    • Posted January 29, 2014 at 6:24 pm | Permalink

      At long last, a reply, Carlos!

      (1) My VA book, which will be called The 3% Signal, will be published in 2015.

      (2) The plan has been selling IJR since summer 2012 as the market has risen relentlessly. I suggest waiting for a buy signal one of these quarters, and beginning your plan then. This is always a good way for newcomers to get started.

      (3) I do think going with indexes rather than individual stocks is a good idea when starting out. Later, when you’ve amassed more capital and know more about stocks, you could run a permutation of the signal plan that uses high-volatility, high-yielding stocks to squeeze even more out of price movement. In the begining, though, the guaranteed recovery aspect of indexes is comforting and enables a person to understand the market in relatively safe way.

      Enjoy the rest of summer,
      Jason

      • Carlos
        Posted July 25, 2014 at 10:19 am | Permalink

        HI Jason, thank you so much for your comments.
        I will be waiting for the 3% signal book!!!

        Regarding the VA strategy, I have a couple of questions, maybe you or someone else in this blog could post your/their opinions.

        (A) First Question
        1. Trading costs. Given in most quarters we have to sell/buy, incurring trading costs, this might become an important expense in certain circumstances:
        – if, like me, your trading costs are higher than in the US/Canada. E.g, in Australia (where I invest), each transaction has a cost of 19.95 AUD (the Aussie Dollar exchanges at 0.80-0.90 USD)
        – if the initial investment is rather low, this trading costs will be high (porcentually speaking)

        2. Taxes.
        If we are selling before the year, there is the Capital Gain Tax. For me, not being an Aussie citizen, that is around 30%.

        Variation to the Plan.
        Given the above.
        If I am in the accumulation phase and not interested in taking profits at this point, would it be fine if at any quarter the ETF has performed above 3% to carry that excess over to the next quarter?
        Say, initial investment is 1000 USD. We expect each quarter the ETF should be 30 US up, 1030, 1060, 1090, 1120.
        If, in the first Quarter, the ETF has increased to 1045 (instead of 1030), would it be sensible to just keep it going on its way to 1060 in Q2 ?

        Would this affect overall performance?

        (B) Another Question: Aiming at higher than 12.6% gain.
        Is it possible to use one of these ETFs + VA technique but aiming at a higher performance?
        For example, that instead of 12.6% / year, we plan for 20%, therefore using a 5% increase per Quarter.

        On the one hand, I guess this will become a constant puring money in to “force” the ETF to that performance.
        But, if we do, especially when the total investment is low, therefore demanding an investment of 500-2000 USD per quarter. Will the final performance and profit be so good or maybe not?

        Maybe we might do this during bullish periods, when some ETFs achieve this levels of performance, even more.
        For Example, for the year 2013, IJR performed at 34%, according to Yahoo Finance.
        If in accumulation phase, will doing VA at 30-40% /year help, or performance will deteriorate?

        Jason, sorry for such a long message, I thank you in advance,
        Carlos

  59. Albert Liao
    Posted September 28, 2013 at 1:27 am | Permalink

    Hi Jason,

    As a recent graduate, your book has been immensely fruitful in laying the foundation of becoming an investor. With that said, as a recent grad, my funds are also extremely limited. For VA, you suggested investing in IJR. However, as of September 27, 2013, the prices have jumped up to roughly $99, quite higher than the examples suggested in your book from 07-11.

    Do you have any other suggestions on other similar small-cap ETFs with a lower price that I could purchase more shares in as opposed to the IJR? Or should my permanent portfolio not be contingent on the number of shares I have, but the quality with which I invest in?

    Thanks so much Jason!

    Best,
    Albert

    • Posted January 29, 2014 at 6:20 pm | Permalink

      I’m glad the book has helped you, Albert!

      Don’t worry about the price of IJR. The plan works exactly the same whether the price is $50 or $100, and the ETF still represents ownership in the smallcap index. It’s the rising and falling of the price that powers the plan, not the absolute price level.

      Good luck with it!
      Jason

  60. David Deutsch
    Posted August 31, 2013 at 4:48 pm | Permalink

    Dear Jason:

    I have enjoyed a career as a successful writer and as an erratic investor until I read your book. Thank you for that. I am no longer a muddling investor thanks to your MVVand IJR strategies.

    My burning question is whether you advise in the newsletter when the timing is right to sell mvv. I inquire because I am not sure I would necessarily make the apt call on Rsi; MACD and SMA. A caution from you would bolster my interpretation of the data. If you don’t do this I suggest you do so.

    Keep up the brilliant work.

    THANK YOU

    David

    • Posted January 29, 2014 at 4:47 pm | Permalink

      Thank you for the compliments on my book, David!

      Yes, I do provide timing guidance on MVV in the letter, but have recently switched to doing so with a modified version of The 3% Signal method set with a higher target to account for MVV’s leverage. This isn’t as good as perfect timing when MACD and other indicators are called right, but the mistake rate is too high such that the methodical quarterly reactive rebalancing of the signal plan ends up outperforming.

      Watch for my new book, The 3% Signal, next year!

  61. Jack
    Posted August 28, 2013 at 6:28 am | Permalink

    Hello Jason,

    I’ve read the 2013 edition of your book and I find the VA plan amazing. I’m currently looking at a stock with great growth every quarter and my question is: If I use this plan, won’t I run out of shares if the company keeps growing? The stock price fluctuates of course but I feel tempted to hold off until a year or so or until the indicators like SMA or MACD tell me to sell because I fear selling too soon with the amazing ability of this stock to grow every quarter.

    What do you think I should do?

    • Posted August 29, 2013 at 9:47 am | Permalink

      For starters, tell me the name of this stock with the “amazing ability” to grow every quarter!

      Of course, nothing grows forever and — counterintuitively — value averaging works best with something that fluctuates in price because the plan takes advantage of the fluctuations to automate the process of buying low and selling high. If the security you use just rises, you’ll simply sell profits beyond the 3% quarterly target every quarter. Your cash account will grow steadily, but each sale will lessen your involvement in the stock so that subsequent quarterly gains are less beneficial to you. This is not good. However, as I said, nothing grows forever. No matter how amazing you consider the stock to be, assume that it can change. They all do, eventually. Just ask former Microsoft enthusiasts.

      Frankly, sticking with the plan as presented is best. A volatile, low-cost index fund guaranteed to recover is the best, all-weather bet. The example I use in the book is IJR, but there are others, which I’m exploring in a new book dedicated to this incredible plan. There’s always an individual stock that would have done better than the small-cap index; too bad they reveal themselves only in retrospect.

      Godspeed!

  62. Frank
    Posted August 8, 2013 at 10:32 am | Permalink

    Hi Jason,

    I just finished reading your book, and I signed up for your letter. I want to implement value averaging in my 401k. I have a couple questions on how to do that, though.

    1) I only have access to certain funds. I have my eye on a “small growth” fund with an expense ratio of .80%. Is that the correct type of fund to use?

    2) I currently max out my 401k each year with contributions from my paycheck every two weeks. I have been using DCA. For VA, what do I do with those contributions? Put them in a money market for use to buy shares when the market is down? During a rising market, won’t I end up with an excess of cash in the money market?

    Thank you,
    Frank

    • Posted August 12, 2013 at 12:28 pm | Permalink

      Thanks for this comment on the free site, Frank. We already corresponded by email and on the subscriber site’s discussion forum, so you’re all set. I’m glad to have you onboard the letter! Jason

  63. Daniel Schwartz
    Posted August 5, 2013 at 4:21 pm | Permalink

    Hi Jason,

    I just finished reading the 2010 edition of The Neatest Little Guide and enjoyed it a lot. I found the specific strategies you suggest quite compelling and especially appreciated the time you spent on different classical investment thinkers. Here are a few things I’m still wondering about:

    1. When you suggest value averaging IJR , how did you pick the quarterly 3% gains rule as reasonable?
    (I realize that picking an unrealistic rule could cause the strategy to go out of whack, but I’m not so sure how to do this for other products.)

    2. Why don’t you suggest value averaging UMPIX?
    (Is there some reason why the strategy is better for the small caps, or for non-leveraged funds?)

    3. Do you have any specific suggestions to make these strategies more tax efficient?
    (I’m just 20, and while I’m willing to be patient I’d still like to enjoy some of my money before I can remove it from any tax-deferred account I use.)

    I’ll be grateful for any advice you can give. And I’ll be excited to get your new book on value averaging whenever it comes out!

    Hope everything’s going well,
    Daniel

    • Posted August 7, 2013 at 9:55 am | Permalink

      Thank you, Daniel, for the kind words! I suggest getting the 2013 edition of the book, as it contains deeper historical context and strategy updates that weren’t in the 2010 edition.

      The 3 pct quarterly pace hits the sweet spot of risk/reward, achieving a 12.6 pct annual return which is about 20 pct more than the market’s long-term pace. Trying for much more than that introduces too much risk that can occasionally wipe out all progress, and settling into much less than 3 pct quarterly gets close enough to market returns to make the effort less worthwhile. If market returns are good enough, then just index.

      You could use a leveraged fund to acheive even more volatility from the 3 pct growth path, offering bigger chances to buy low and sell high, but the leverage can go so far down in extreme times like 2008/09 that the plan requires too much cash for people to continue. These instances are rare, but they happen, and to better weather such storms a long-term plan like the 3 pct signal should use a more all-weather vehicle. I like the non-leveraged small-cap variety because they introduce more volatility than large market indexes like the S&P 500 but not so much that the plan self-destructs in very bad times. Now, a person who had the cash to fund buying into severe sell-offs of the 2008 variety would have done very well in a leveraged vehicle, but such people are rare for two reasons: extra capital is scarce in tough times, and the guts to buy extreme sell-offs is even scarcer. Mathematically, sell-off buying is immanently sensible. Emotionally, it isn’t.

      As for tax efficiency, a retirement account is without a doubt the best home for quarterly trading strategies. Tax-deferred and tax-free accounts get around all trading-related tax liability, making the coast clear for just following the buy and sell signals without a second thought about taxes.

      Get the 2013 edition and get your plan started!

      Best of luck,
      Jason

  64. Chandra Kumar
    Posted June 24, 2013 at 11:12 pm | Permalink

    Jason,

    I immensely enjoyed reading your latest book The Neatest Little Guide to Stock Market Investing. You showed an example for Value Averaging plan, explained on page 119 from smallcap stocks. My question is can the same strategy work with other Index funds like S&P 500 Index or Total stock market Index or Mid cap Index funds?

    Is it possible to get the excel sheet for the Value averaging plan.

    Thanks you very much

    Chandra

    • Posted July 9, 2013 at 2:34 pm | Permalink

      Thank you, Chandra!

      Yes, you can use the value averaging plan on any security. However, small caps outperform large caps over time, so when we apply the market-beating value averaging plan to an index that already outperforms the main market indexes, we achieve a double-whammy benefit of beating a higher-performing index. This means that we’ll almost certainly beat the market as defined by the S&P 500, but and should beat even the better-performing smaller cap indexes as well. It nearly goes without saying that we’ll beat the vast majority of pros, therefore, because 2/3 of them fail to beat the S&P 500.

      Ah, another spreadsheet request! I’m working on a book about my 3 percent value averaging plan that will include more extensive tables than the ones shown in my Neatest Little Guide. Once I’m farther along, I’ll look at converting some of my working sheets into publicly usable files at Google Docs.

  65. Steven Johnson
    Posted June 24, 2013 at 5:53 am | Permalink

    Jason,

    I just read your 2013 edition and it was a great read. Here is my plan: I am 24 years old and from what I gathered from this book, I will be starting a VA plan in a roth IRA account. Also, I would like to start a regular brokerage account using the Dogs of the Dow strategy.

    My ultimate goal is to be rich by the time I retire. I will live modestly until retirement age, using 20% of my income for investments. I will also be receiving a pension starting at the age of 45. Will utilizing these two plans be in my best interest, considering what my goals are? I am also looking for a simple, mechanical approach to investing.

    Thanks,
    Steve from Kansas City

    • Posted July 9, 2013 at 2:30 pm | Permalink

      Thank you for the compliment, Steve!

      I admire your goal and think the mere fact that you’re researching investment strategies and planning your future at a young age implies a good chance that you’ll succeed.

      Yes, the VA plan on a small-cap investment such as IJR featured in the book is a great idea for your Roth IRA. Dogs of the Dow and other yield-based strategies are good for your brokerage account, and I suggest using some of the other techniques you read about in the book to buy and hold long-term performers. It doesn’t take too many homeruns to significantly boost your overall return.

      As for mechanical investing, you won’t do much better than my 3 pct quarterly plan using value averaging. It’s so good that I’m currently working on a new book dedicated to it. You know the gist of the plan from my stock book, but I’m afraid that the explanation is too short for what should be a foundational strategy for most people. Frankly, most people would do better over their lifetimes by just following the 3 pct plan and ignoring all else about stocks and what’s reported in the financial media. We are our own worst enemies in the zero validity environment of the stock market, and a mechanical system built on the basic notion of buying low and selling high as the market fluctuates through the extremes is far preferable to fickle human emotion. Stay tuned!

  66. Don K
    Posted June 4, 2013 at 12:49 am | Permalink

    Hello folks. I read the 2010 edition of the book, then purchased the 2013 edition and passed the 2010 edition on to my daughter.

    My question is for the Value Averaging and other maybe even the other portfolios, should we use them in retirement accounts, non-retirement accounts, or even both to get the ground work in place?

    Thanks,
    Don

    • Posted June 7, 2013 at 1:02 am | Permalink

      Don,

      Any plan that trades within a one-year time frame, as does the quarterly VA plan explained in my stock book, is best in a tax-deferred account to get around short-term capital gains reporting. Even with only four trades per year, some will generate short-term gains you’ll need to report and that can be a hassle and cost too much in taxes. It’s possible to sell older shares if you track when certain lots were bought, but the basic advice is that tax-deferred accounts are best for any plan that engages in short-term trades.

      However, many regular accounts see a lot of short-term trading. Not only does the VA plan outperform the indexes and almost all pros, its four trades per year involve much less trading than many people do, anyway, making the plan better than most wide-open, haphazard money management approaches people use. This is why you should consider using it in your regular account, as well. It will probably produce better net returns than any other type of active management.

      If you need to choose just one account for VA, go with the tax deferred. If you want to put your whole money management under its effective guidance, then feel fine utilizing it in all of your accounts.

      Best,
      Jason

  67. Posted May 18, 2013 at 12:21 pm | Permalink

    Dear Mr. Kelly: I looked over the information you provided on your website. I’m looking for a minimum of a 3% yield and a 2.7% dividend such as KMP, EPD, KMB, AT&T, MCD, DUK and TEG. I’m also looking for the top 10 Forever Stocks like AT&T, KMP, KMB and MCD. These types of stocks are bought and kept for lifetime. I’m building a high yield, high dividend stock portfolio so when I retire, I can live off the dividends every month without selling the stocks. Some of the stocks I currently own are KMP with a $1.30 quarterly dividend which I reinvest, EPD with $0.67 quarterly dividend, DUK w/$0.76 quarterly and AGNC w/$1.25 quarterly dividend. These are the types of dividend stocks I’m only interested in owning. I hope your website can help.

    David King

    • Posted May 22, 2013 at 12:37 am | Permalink

      Thank you, David. Tier 3 of the letter contains a section for dividend stocks. They form part of the strategy and have contributed a lot over the years. Some ETFs are paying decent dividends now, too, and can be safer than owning individual stocks. Many of the best dividend stocks are well established and safe, so it’s not much of an issue, but the ETFs are still worth considering. Many focus on bonds, of course. PowerShares Senior Loan Portfolio ETF (BKLN $25), for example, yields 4.8 pct.

  68. Dan
    Posted November 14, 2012 at 4:15 am | Permalink

    Looks like Jason is neglecting his own blog.

  69. Ryan K
    Posted August 13, 2012 at 10:21 am | Permalink

    Hello Jason,

    Just finished your book for the second time. The first time, maximum midcap looked like an ideal strategy for me; however, my investing style has changed to that of dividend investing. So I have a few questions:

    – Would value averaging be applicable to a single stock or portfolio of say five stocks? Setting goals for each of them to have 3% quarterly gains and supplementing the weak with the winnings from the strong.

    – What would you do when you receive a dividend in this scenario?

    – Would this work with a Dividend ETF? From my understanding most follow preferred stock and not common, not sure how that affects the strategy.

    – Finally, in your example are you keeping the cash in straight cash or would it be wise to maybe put it into a money market?

    Thank you very much for taking the time out to answer my complicated questions.

  70. David B
    Posted June 8, 2012 at 9:13 am | Permalink

    Hi Jason,

    I recently read your book and did a little bit of backtesting using your value averaging strategy. I started in 2007 with a midcap 400 fund up until date. Even through the brutal market the strategy still managed to take in a profit of about 11% whiles the average investor got destroyed. In the book you list a few technical indicators like MACD, RSI and SMA to help with market timing. If your opition do you think it is worth jumping in and out trying to time the market or just sitting tight and taking the ride ?

  71. Sam
    Posted May 29, 2012 at 5:38 am | Permalink

    Jason, I’m really enjoying your book. I also have the same question that Mark asked back in November, namely, how do you incorporate ADDITIONAL funds that you are accumulating through contributions to a 401k plan to this value averaging model? Let’s say I have $200/week withheld from my paycheck going into my 401k plan. Do I keep it in cash until there is a ‘buy’ signal generated to keep the account on pace for the 3% quarterly growth? In an up market it could be quite awhile before this cash gets used. If so, do I then deploy all of the contributions, and perhaps establish a new value path due to a potentially higher base? I’ll quit with the specifics, and allow you to comment basically on how to handle this cash flow that isn’t normally generated from a typical lump sum starting point. Thank you.

  72. Mark
    Posted January 24, 2012 at 2:03 am | Permalink

    This study shows why you may have found 12% to be a sweet spot. They suggest goals between 10-12% to provide the best returns for the risk. Basically, they found that going over 12% increased the risks while not significantly increasing returns. Pretty interesting.

    • Posted January 24, 2012 at 5:27 pm | Permalink

      What a great study, Mark; one I hadn’t seen yet. Thank you for it. The results are so in-line with my own conclusions and supportive of what I’ve written that people are going to think I commissioned the work!

  73. M.F.
    Posted December 27, 2011 at 10:12 am | Permalink

    Is there any reason why you shouldn’t aim for more aggressive profits by using a figure greater than 3% for the quarterly increase in value? As I see it, this will require you to have more cash on hand to make up shortfalls if the market goes down, but the returns on investment will be greater if/when the market rebounds.

    • Posted January 11, 2012 at 2:01 pm | Permalink

      I’ve tried more aggressive figures, but 3 pct works out just about perfectly. It outpaces the market’s historical average by about 20 pct annually (20 pct better than the market’s long-term average, not a raw 20 pct return, of course) without signaling wild fluctuations in the cash account. It’s easy to try different targets on your own, though, and dial into the one that works best for your goals and temperament. I find 3 pct to be the sweet spot.

      • M.F.
        Posted April 17, 2012 at 8:09 am | Permalink

        Jason, I’m wondering if you could double-check my numbers on modeling the Value Averaging strategy over the past 5 years. Assuming an initial investment of $10,000 in March 2007, when the S&P was at roughly the same level as it is now, what would be the current value of the account? By my calculation, the ETF would be worth ~$17,500, while the cash account would be worth ~$5,700. However, given the need for cash infusions totalling ~$11,900 throughout 2008 and into 2009, the average annual return would be only ~2.6%.

  74. Mark
    Posted November 12, 2011 at 1:58 am | Permalink

    Jason-

    Some very nuts and bolts questions regarding the VA plan.

    1. Do you recommend doing this in tax sheltered (IRA/401k) plans first or other strategies there and this in a regular investment account?
    2. Is there a timing aspect to this in terms of when to start? If so, how do you determine that?
    3. Do you invest all that you can immediately? e.g. you have 300k to invest, put 300 in the first quarter, it goes down 10% (bad quarter!), you need 30k to fill-what do you do? What is an ideal reserve % to investment % in your opinion?
    4. What ETF are you using in the above example?

    Thanks and love the book and advice. Wish I had read it 13 years ago when I started investing…

    • Posted November 12, 2011 at 11:30 am | Permalink

      Good questions, Mark.

      Starting in tax-deferred accounts makes sense because many of them offer a limited menu of investment options and this plan works with just about any of the popular ones. That makes it a great way to get the most out of a limited menu. While I prefer using the plan with an ETF, a regular mutual fund also works. Once you see how well the plan works within your retirement accounts, you’ll probably use it in your regular accounts, too, at least with part of your capital.

      For getting started, I suggest running the plan on paper until it issues a buy signal and then starting. This is what I usually advise subscribers to do each week in the letter. The waiting is hard, but almost always worth it. For example, those who waited in Q3 this year enjoyed a wonderful chance to buy in early October after the S&P 500 fell 19 pct from its July high. While the plan will work from any level, it’s psychologically more satisfying to see it produce profit from the get-go.

      I would not invest all of your capital immediately because you’ll need buying power at the end of weak quarters early in the plan before it’s had time to kick off cash. For more on this point, I offer the following excerpt from the October 2, 2011 issue of The Kelly Letter:

      Which brings me to the number-one question I’ve received: How much of my cash should I devote to the plan? As an example, I’ll use a note I received from a new subscriber, a retired engineer who wants to put his IRA in the Tier 1 plan. He currently allocates 36 pct of his IRA to a bond fund and the remaining 64 pct to cash. He wants the account to be self-sustaining without any additional cash injections.

      There’s always judgment involved. For example, if he thinks the concerns over Europe and a US recession are overblown, maybe he’ll want to put 80 pct of his IRA into our ETF and keep just a 20-pct buffer for later buys. If he thinks we’re standing at a precipice but doesn’t want to miss out on all the gains if this turns out to be a bottom, maybe he’ll want to switch those percentages around and put 20 pct into our ETF and keep a full 80-pct buffer for later buys.

      I would suggest splitting the difference and going 50/50. If it’s a $200K IRA account, buy 1709 shares of our ETF at $58.50 and leave the rest in cash. That leaves plenty of firepower in the buying department, but also buys enough exposure to feel good about a 20-pct recovery in our ETF that would see the invested $100K turn into $120K.

      As for which ETF, I show it in my book and letter. However, in all honesty, you can run the plan with any broad-based index ETF that sports a low expense ratio.

      Thank you for the compliments, and good luck!

      • Mark
        Posted November 15, 2011 at 4:39 am | Permalink

        Thanks Jason, this helps a lot.

        Thanks Jason-

        One other point is about how you incorporate additional money into this model? For example, you start out with a 401k with 100k. Following the previous advice you purchase 50k at the best time as you can determine. You are doing your quarterly buy/sells. Over the next year, 16,500 flows into the account due to your continued contributions.
        1. I assume that you’ve put these into your “cash” or “cash equivalent” portion, so that it is available for buying in if needed rather than DCA directly into the fund. Correct me if that’s incorrect.
        2. If you have done as described and still have enough cash buffer, how do you plan to incorporate these additional funds? On “buy” times do you put in more than would be needed to take you up 3%? How much of your new cash would you put in? I had an idea that I could “save ” until there was a “buy” and then add what I had saved until that point. So if I had 4 quarters of selling and then a buy, I could incorporate the additional funds. If there were 2 buys in a row, the 2nd would only get the 1 quarter of input, but at least you are buying at relatively lower times.
        3. If you did put more in in a given quarter, I would assume that you would update your “base” investment amount so that you would expect 3% on top of the new total and add/remove from that.

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