The 3% Signal: The Investing Technique That Will Change Your Life

Jason Kelly’s latest writings on investing in financial markets elaborate upon an idea that he proposed in an earlier book “The Neatest Little Guide to Stock Market Investing”. I found that book to be among the most concise and useful reads on this subject as he walked us through conveying an understanding of the strategies that have some of the best financial investors have used to make their millions and billions but more important the concepts, terminology and practical plans that the average person can use to achieve financial security. You can start the 3% Signal plan with any amount you want, but ultimately it is a $20,000 initial investment that fits a 40 year working-life time frame. The book uses a $10,000 investment, which still works out well.In the 3% signal Mr. Kelly lays out his argument in three sections. The first section helps you to understand the psyche that one takes into investing, and how we construct the view of our successes and failures which shape independent decision making. The books he bases this discussion on are well worth the read just for understanding how are perceptions are shaped outcomes arise in everyday life. The 3% Signal then discusses how buying into the stock market is a lot like tossing a coin, the odds of making the right call are probably 50/50. Since investing in the financial markets is a bit of a gamble why not focus on how to use the outcome of the coin toss (stock prices) to your advantage by buying in to an indexed fund, which gives you diversity in your portfolio (Modern Portfolio Theory) and then make quarterly trades into and out of that fund to your advantage, i.e. sell an appropriate portion of your fund when the price has risen in the quarter and buy an appropriate portion of the fund when the price drops over the quarter. The goal is to buy or sell sufficient amounts of the fund for you to achieve 3% growth each quarter.The second section of the book goes into the details of how to achieve optimum results, which include buying into the fund at the lowest point possible (around 55% of the gains in the fund are based on share price gains), so you need to be patient and wait for a nice drop in the fund price to buy in (Oct 14 would have been a great time, a shame this book didn’t come out 4 months earlier) and then invest in a fund that tracks its index well. To aid in this investment quest you also need to buy into a bond fund to keep your excess cash from quarters when you sell your shares at a higher price and from which you draw upon to buy shares when they are relatively low in price. Again the amount of shares you work with in each of these quarters is based on achieving the specified 3% growth for the period. Since both the index fund and the bond fund will be paying you a small rate of interest this also contributes to your income growth. This almost sounds too good to be true, but it does work, although not without a couple of hiccups.If there were no major market ‘pullbacks’ the growth from your initial $20,000 investment would be $1,000,000 in around 40 years, and without the need to add any additional money, the optimum outcome….but we know that the markets don’t work out that way. The book charts (back tests) the results of this strategy from 2001(Q1) - 2013(Q2). Out of 50 quarters additional/external cash was needed 11 of these quarters, when the amount in the bond fund were insufficient to buy the suggested amount of shares for the index fund. Although this (22%) may sound like a high percentage of quarters, the amount required for 4-5 of those quarters could easily come from your savings ($200-1600).Now you ask, what about those other 5-6 quarters? This is where this goal becomes tricky. As you can probably guess, the great damage to your account is done from 2008(Q1) –2010(Q2) during that Black Swan event where so many things went wrong. From 2007(Q4) to 2010(Q2) there was a funding shortfall each quarter, 2-3 of these could probably be made up from savings, while most people would have the $4000-$10,000 needed for the other quarters, three of which were back-to-back, 2008(Q4) - 2010(Q1), and required @$36,000 of external cash for index fund shares (over this 2.5 year period) in order to stay on track for the 40 year time frame (Remember the financial markets dropped by half)! I doubt few people would be able to meet these monetary demands. BUT DO NOT PANIC and DO NOT SELL! All you need to do is WAIT. It would also helpful if you contribute whatever money you can spare to the index fund because it is in these periods of great share price declines that you get the best deals; remember, you sell when the share prices are high and buy when they are low. Any time you cannot buy shares in the fund when warranted by the signal, will take 2-4 additional quarters to make-up, but this only means that it will take you a bit longer to make that $1 million. It would be prudent to assume that large market pullbacks will arise at least once each decade but know that you can plan for this by putting away money to help you in these unusual periods.To more succinctly summarize one critical point that may not be so obvious about this strategy, the longer you are in the plan the more money you have, and the more money you will also need for the large share price decline events! To add an additional note, fairly early in the accumulation period, when the fund was <$100,000, it required the addition of a few hundred additional dollars, for three quarters, which could be easily met from savings. If your fund was $700-800,000 and another Black Swan event happened, however, you are going need several hundred thousand dollars (@$500,000?) in external cash! This is the time when you really want to remember to hold! I know easier said than done. I’ll update this part of the review if I am ever in this position.The third section of the book provides a lot of useful advice for how to go about acquiring that initial amount you need to buy into the plan through a very informative discussion of various savings, and retirement plans that can get you started.My only regret about this plan is that I wish I had understood the 3% signal better when I first read “The Neatest Little Guide to Stock Market Investing,” which just happened to be in early 2008. My income had just doubled and I was looking for productive ways to invest the extra cash, but I didn’t want to put money into something I didn’t understand. Nevertheless, that book and “The Ultimate Dividend” by Josh Peters saved me from squandering my good fortune.While I’m too old to reap the benefits of a 40 year time frame, now that I understand how this system work, I’m going to transfer a suitable sum from my IRAs to set up the index and bond accounts, and I’ll see what happens over the next 10-20 years. More important to me however, because of this book, I also know what I’m going get my son for a college graduation present…a similar set of brokerage and bond accounts that I’ll contribute 50% to the initial position, with the caveat that he has to add the remainder as soon as he can. In the interim, as long has he is saving up I’ll be willing to cover the pesky external cash add-ins that are sometimes required to keep the fund on track. Note I’m doing this in the early stages of the fund, when it is cheap! In addition to Mr. Kelly’s advice on retirement savings plans found in this book, I want my son to forgo Roth contributions until he has this initial position.

This book is how to invest in the stock market by using a special technique based on what the market did (not what will happen). You only need 2 financial products to apply this technique, a small cap Index fund and a bond Index fund. The author prooves that his investing philosophy can beat the majority of mutual funds and also the famous dollar cost averaging technique. All in all, this is a book that worth your time, even if you don't want to apply its philosophy.

Disclaimer: I have officially drank the Kool-Aid. I've read the book three times, I've followed Jason Kelly's weekly newsletter for years, and finally started the 3% Signal plan earlier this year. After sitting on the sidelines for far too long, I've grown increasingly confident that I've finally found an investing strategy that I can understand and execute without having to divine what's coming next for the stock market. I still do keep an eye on things, but now I find it more amusing than informative to read what "Zero-Val" analysts (that's all of them) are predicting. To paraphrase Jason's sentiment, those pundits and reporters don't actually know where prices will head next. Neither do I, and I don't care. The anxiety of managing my retirement account investments has been lifted, and I feel liberated and motivated to keep learning more about how this plan works.In particular, I finally feel that I have near mechanical answers to philosophical questions that have confounded me, such as: If you want to buy low and sell high, how do you know when to sell? (The answer comes primarily from running a simple calculation once every quarter, with notable exceptions that dictate when you should just sit on your hands and wait.) No need to be concerned about whether we're headed for a bull or a bear market; all that matters is what happened this past quarter. Just rebalance your accounts, and move on.To experienced investors familiar with dollar cost averaging or index fund management much of the content will seem familiar, and even possibly lifted from other investing books. But the devil is in the details. He explains clearly how he has improved upon these ideas to avoid the traps of emotional or predictive based investing. His method of reactively rebalancing between accounts once a quarter to keep your index fund growth line at 3% per quarter (12% a year) is exacting, but forgiving; you need to keep an approximate 80/20 balance between them, and you pick accounts from your broker that eliminate all unnecessary transaction fees. You also need to continue to contribute to your retirement accounts to keep pace with the plan; but if that isn't always possible, he addresses that concern as well. This may all sound like too much to take in for someone new to investing, but for anyone willing to spend some time with the ideas in this book, I can all but promise that it will seem simple and obvious in retrospect.Of course, if you are (like me) the type of person that looks at the underworld mechanics of Wall Street will skepticism, you might have some serious reservations. I will freely admit that I am relatively new to this plan, I might be missing something in my understanding of it, and I'm still collecting data in an to attempt to disprove the theory (or get rich trying). But Jason has truly written something special in this book to help put those concerns to rest. As I followed his reasoning behind each piece of the plan, he presciently anticipated and squashed almost every objection as they occurred to me. It was so well argued, that I have concluded that Jason is either a master investor or an accomplished hypnotist. Either way, I'm convinced. It sits here on my desk as my personal bible on investing, and I purchased several additional copies and handed them out to close friends that I know could benefit from Jason's advice, but would hunt me down if it turns out that I'm wrong.So... is it working? Well, so far, the value of my accounts has only gone down since I started the plan. However, I'm thrilled about that, because that means it's time to invest even more. When the market goes back up, I'll be just as thrilled then of course, because it will mean it's time to take profits off the table to be used in a future downturn. It doesn't really take the emotion out of investing; it just turns most of the anxiety into a general feeling of cautiously optimistic smugness.Note: If you do read the book and decide to start the plan, I highly recommend also subscribing to The Kelly Letter to follow along with him every week; it's a great touch point to ensure that you're following his plan to the letter. It's not necessary to understand how it works, but I've found it extremely helpful to have timely advice with real life examples to compare my own accounts with to make sure I'm headed down the right path.

Este libro realmente muestra una estrategia sólida y fácil de aplicar para lograr un proyecto de inversión a largo plazo.

I think this is a great book for anyone that wants to invest in the stock market. The method provides a way for the average investor to buy low and sell high without having to watch the market every day.The book is well written and is easy to read with plenty of examples and back testing results.I have personally purchase four copies of the book. Two for myself and one for each of my children.

Jason Kelly is an engaging author. What he says makes sense, then he explains it further with clear examples. I strongly recommend reading his "Neatest Little Guide to Stock Market Investing" first; it will give you a good basic understanding of the stock market. There he also introduces what later becomes the more fully explained 3Sig plan. He writes with humour and doesn't talk down to the reader. Worth your reading investment!

Received as described.

Excellent