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The 3% Signal: The Investing Technique That Will Change Your Life, by Jason Kelly
Free PDF The 3% Signal: The Investing Technique That Will Change Your Life, by Jason Kelly
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Take the stress out of investing with this revolutionary new strategy from the author of The Neatest Little Guide to Stock Market Investing, now in its fifth edition
In today's troubling economic times, the quality of our retirement depends upon our own portfolio management. But for most of us, investing can be stressful and confusing, especially when supposedly expert predictions fail. Enter The 3% Signal. Simple and effective, Kelly's plan can be applied to any type of account, including 401(k)s -- and requires only fifteen minutes of strategizing per quarter. No stress. No noise. No confusion.
By targeting three percent growth and adjusting holdings to meet that goal, even novice investors can level the financial playing field and ensure a secure retirement free from the stress of noisy advice that doesn't work. The plan's simple technique cuts through the folly of human emotion by reacting intelligently to price changes and automatically buying low and selling high. Relayed in the same easy-to-understand language that has made The Neatest Little Guide to Stock Market Investing such a staple in the investing community, The 3% Signal is sure to become your most trusted guide to investing success.
- Sales Rank: #177524 in Books
- Published on: 2015-02-24
- Released on: 2015-02-24
- Original language: English
- Number of items: 1
- Dimensions: 8.01" h x .68" w x 5.27" l, .51 pounds
- Binding: Paperback
- 336 pages
Review
"We often hear, and have come to believe, that models beat experts. Kelly offers the individual investor a simple, mechanical model that instills discipline, removes a lot of self-sabotaging emotion, and has a good track record. Will it continue to outperform? Actually, it just might."—Brenda Jubin, "Reading The Markets" book review at Investing.com and ValueWalk
From the Author
Two New Terms from the Book
3Sig: Shorthand for "The 3% Signal," both the book's title and the technique it describes.
Z-val: Shorthand introduced in The 3% Signal for"zero-validity forecasters" and "zero-validity environment." The latterphrase was coined by Nobel Prize winner Daniel Kahneman in his book Thinking, Fast and Slow, where he wrote that "stock pickers and political scientists who makelong-term forecasts operate in a zero-validity environment. Theirfailures reflect the basic unpredictability of the events that they tryto forecast." This is why stock market forecasters are proven to sportan accuracy rate of about 50 percent, same as a coin toss ... yet theycontinue forecasting.
Quote from the Book
"You'll discover how to check inquarterly to see whether the stock fund's growth is below target, ontarget, or above target, then move money in the appropriate directionbetween the stock fund and the bond fund. This action, using theunperturbed clarity of prices alone, automates the investmentmasterstroke of buying low and selling high -- with no z-val interference of any kind."
Reader Review Highlights
"3Sig is, in my opinion, a move to improve upon dollar-cost averaging and indexing. While I am oversimplifying 3Sig by saying that, and there is more to it, I think that vaguely explains the idea to the uninitiated reader. By and large, I do believe that Kelly has mostly succeeded in this improvement." -- Scott W. McMurray II
"In Kelly's model, prices tell you exactly how to adjust things so that you do buy low and sell high atgiven intervals -- and without deluding yourself that you can predictwhat the market will do." -- David G. Deutsch
"I trade options for a living (my own account). After reading the book I am now using his strategy on a portion of my portfolio. Overall, the strategy is good for the passive investor or full time trader. If anyone is skeptical, you may like to know that I have backtested Kelly's 3% strategy versus many other strategies (Covered Calls, Selling Puts, etc) and his strategy constantly outperforms over the long run." -- John Wilson
"This is the one and only book I recommend relative to equities because, frankly, it's perfect. You quit listening, and start managing. Systematically. Four times per year. Meanwhile, you spend your newfound time on the rest of your life and leave your money stress behind." -- Lovelee
"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. ... As I followed his reasoning behind each piece of the plan, he presciently anticipated and squashed almost every objection as they occurred to me." -- Jamie Low
"I'm currently running the plan in my 401(k) and IRA accounts. Having just finished my first quarterly rebalance of the plan in both accounts I must say that, for the first time in my investing life, I felt in control of my retirement savings!"-- Rick George
From the Back Cover
"What the experts don't want you to know ... is that prices are all that matter. Ideas count for nothing; opinions are distractions. The only thing that matters is the price of an investment and whether it's below a level indicating a good time to buy or above a level indicating a good time to sell. We can know that level."
-- JASON KELLY, The 3% Signal
Most helpful customer reviews
56 of 56 people found the following review helpful.
An Interesting and Mechanical Approach
By Scott W. McMurray II
INTRODUCTION
As this book is primarily about a particular investing method, my review of the book is, in many ways, impossible to parse from my review of the method that is put forth by the book. This method is known as “The 3% Signal” and is aimed towards achieving roughly three-percent growth each quarter, much as the title might suggest. For readers familiar with Jason Kelly’s most popular book, The Neatest Little Guide to the Stock Market, you may recall there is a segment discussing an investment method with a small-cap fund that aims to achieve 3% per quarter. In a nutshell, Kelly’s latest book focuses on a more comprehensive and nuanced version of that plan.
There are some upsides and downsides to this method, which I will get to in due time, but I will first discuss my thoughts on the book itself. As always, Jason Kelly has a writing style that is easy to follow, clear, and articulate. He’s a cool guy that I believe genuinely wants to educate about investing. I think that this book is best suited towards those that have an understanding and appreciation for investing, but want to minimize the amount of time that they spend doing it.
HUMAN PSYCHE AND UNPREDICTABILITY
He begins this book with a discussion about why, in his opinion, markets are simply not predictable. He goes as far as citing Burton Malkiel’s “A Random Walk Down Wall Street.” This text is, of course, commonly cited by those falling more into some stronger form of the EMH (efficient market hypothesis) camp. While Kelly flirts with this position more than I was expecting or hoping, based on my enjoyment of his best-seller “Neatest Little Guide,” I believe that he ultimately more or less comes to the conclusion that most people simply can’t help themselves and be disciplined by approaching investing as more of an emotionless machine. Thus, for most people, trying to time the market, and for some, even trying to simply evaluate based on value, might be more difficult due to allowing emotions and biases get in the way. This is what I believe he’s really getting at, and something I’m much more prone to agree with, even though tendencies obviously vary with the individual.
In examining investor-psyche, Kelly also delves into what he calls “Peter Perfect.” In short, Peter Perfect is a euphemism for the “would have, should have, could have” mindset that plagues investors when they look back at what the market did retrospectively. Back in 1999, it would have been very easy to think “gosh darn it, I should have purchased Microsoft a year or two ago.” Or in 2012, it would have been easy to do that with Apple. In short, there is always some stock that you may have sold earlier than ideal, or let “slip by you.” But the point Kelly is accurately making is that you are never going to be perfect with the market, that is, buy at the lowest of lows and sell at the highest of highs… so it is a fruitless endeavor to allow Peter Perfect into your thoughts. Even for the lucky soul who did sell at the highest point, it’s unlikely that they bought at the lowest point, or that they achieved such perfection with their other stock positions. Even the best of investors virtually never fulfill Peter Perfect’s guidelines. The market does have some unpredictability to it, and it’s not as forthcoming as Peter Perfect would have you believe.
THE "3SIG" METHOD
And it is because of this (1) human psyche and (2) unpredictability, as summed up by Jason Kelly above, that he proposes the “3% signal” as an investing method. He calls it “3Sig” for short, and I will do so for the rest of this review. Because 3Sig is aimed at achieving about a 3% growth per quarter, by using a mix of stocks and bonds, Kelly does lay out fairly nicely why he believes this is a good number to shoot for, rather than 2%, or 4%, or something else. It primarily relies on history and looking at how the markets have fared over the years. He rightly points out that you could aim for as high of a number as you like, such as 8% per quarter growth… but more likely than not you’d simply be adding money to it all the time in order to achieve that target, which is not what the goal of investing is.
3Sig is naturally compared to two other common methods of investing: the buy-and-hold method, and the dollar cost averaging method. The buy-and-hold method is obviously the easiest to utilize, as you don’t have to take any actions after buying, beyond making sure that the value and reason for holding are still there. The biggest problem most investors encounter with this method is, of course, when do you finally sell and why? Dollar cost averaging takes the guessing work out of that by causing you to effectively buy fewer shares of equity when the market is “high” or “overbought” and more shares of equity when the market is “low” or “oversold.” Dollar cost averaging is fairly straightforward as well, but generally does require attention once a quarter.
3Sig is, in my opinion, a move to improve upon dollar-cost averaging and indexing. While I am oversimplifying 3Sig by saying that, and there is more to it, I think that vaguely explains the idea to the uninitiated reader. By and large, I do believe that Kelly has mostly succeeded in this improvement. The joy of 3Sig is how easy Kelly makes it. Essentially, one only needs a stock ETF and a bond fund to effectively manage their 3Sig portfolio. Without delving too deeply into it, I believe the reasons for running 3Sig this way are justifiable. Kelly further points out the advantages of using both a small-cap emphasized ETF and a low-cost one, and shows why several of them could potentially do the job.
3Sig is interesting in that it will tend to slightly underperform a perfectly executed dollar-cost averaging method during an extremely bullish market that keeps going up. But it makes up for this by slightly over-performing much of the rest of the time. This is partially attributable to its use of bonds in the mix, and partially attributable to its maintaining 3% as the ideal path of growth, even during the quarters where the market achieves more than 3%. Due to this, however, it serves as somewhat of a hedge against rising or falling too rapidly at the whims of the market, satisfying those who find volatility less tolerable.
Despite these positive attributes, however, 3Sig is not without some downside. First, the entire investing method is premised upon 3% being the targeted growth per quarter. During the occasionally long spells where this is not the case, one could find themselves throwing much more money in to keep up during bear markets. Kelly does, however, address this by pointing out that sitting on what you have is better than freaking out about not being able to keep up. And I would add that recent modern history thus far has shown that 3% isn’t necessarily a crazy percentage to be aiming for. Second, this method does require more effort than dollar-cost averaging and definitely more effort than buying and holding. This shouldn’t be too surprising, though, since it is trying to beat both of these methods. It’s not a lot more effort, but there are a few more things involved and one should be familiar with 3Sig and be prepared to stick to it if they are going to use it, as it has mechanical steps that need to be followed.
CONCLUSION
All things considered, I enjoyed this book. I still have a soft place in my heart for Kelly’s “Neatest Little Guide,” and would tell anyone who is extremely interested in investing to read that one first. But 3Sig offers something that is straightforward, effective, and workable for anyone with a little inclination. Towards the end of the book, Kelly offers a hypothetical scenario comparing a 3Sig user to two other investing methods simply to try to give a frame of reference to what using it might feel like while experiencing the ups and downs of the market over several years.
I think the biggest upside to this method is that it is simpler than actually managing a portfolio of 20, or even only 5, stocks, since it can be so mechanical. For the thoughtful and investment-minded person who has other things they would rather do than manage their portfolio, something so rote, low-cost, and straightforward, can be very beneficial. The unfortunate part is, of course, that the people who could most benefit from reading this might likely be those who have zero interest in investing or bettering their finances… but this is sadly true of many, many books on finance.
This is a good book. I admittedly am still partial to Kelly’s “Neatest Little Guide,” but these two books are so different that it isn’t really fair to compare them to each other. They just hit on different things. I’m happy to give it 5 stars, as long as the reader bears this in mind: Kelly’s “Neatest Little Guide” is more about exploring the world of investing more deeply and setting them on that journey, whereas “3Sig” is more about simplifying their investing life as much as possible, so that they don’t have to think about it and can do other things. Which side of this you should emphasize more in your own investing journey really depends upon what kind of person you are.
**Disclaimer: The thoughts in this review are solely my own. I was offered this book as a gift, but was not provided any other form of compensation.
67 of 73 people found the following review helpful.
Potentially solid technique inaccurately labeled as new advice
By N
I have mixed feelings about this, and do have objections that I will address in the review. What I disagree with most, is the claim from the back cover that this is a "revolutionary new strategy".
As others have mentioned, it is a little tiring on the rants against the financial industry. However, I guess some out there need to hear this if they haven't already. Although, at this point, it has become more or less common knowledge that passive investing via index funds should be the default strategy for most retail investors. The secret is out, that over time, even professional money managers will lose to the index. Study after study has shown this. At the core, this is what the 3% strategy involves, so in that respect it is nothing new. For those out there that are uninformed, look up "Bogleheads", or research the story of the Vanguard group. This will go a long way to get you up to speed on this. This "revolution" against account management fees and against speculative picking of individual stocks was started long ago (70s) by others and continues to become more mainstream. It is arguably the best default approach. Risk is managed within your portfolio of index funds by allocating a certain percentage between different asset classes, including stocks and bonds.
Now, once you have decided to go with index investing (smart choice), the next decision is how you will manage the money in your plan. There are 3 well-established methods for this.
1) Depositing a large chunk of new funds at random times (lump-sum investing)
2) Depositing equal amounts of the large chunk at regular intervals (dollar-cost averaging)
3) Depositing funds into a "safety bucket" at regular intervals (value averaging)
This plan calls for an index portfolio that uses value averaging to manage the money within plan. This technique was first described in the late 80s by former Harvard finance professor and MIT PhD, Michael Edleson. The book describing this is available on Amazon titled "Value Averaging: The Safe and Easy Strategy for Higher Investment Returns". It is probably the least known of the 3 methods and has been described as "the closest thing to consistently buying low and selling high". The key difference between value averaging and the other 2 is in the method of rebalancing. With lump-sum investing and dollar cost averaging, the portfolio is set at a fixed allocation ratio between stocks and bonds and the performance of the portfolio is then at the whims of the market. With value averaging, the opposite is true. The performance of the portfolio is set at a fixed target and the ratio of stocks to bonds is then at the whims of the market. In both cases, you rebalance by selling or buying stocks and bonds. With value averaging the rebalancing is often done more frequently.
The good news with value averaging is that it does have some academic evidence that it is indeed the most successful way to allocate funds within a portfolio when used within certain conditions. For those interested, the following link is for a study performed by Paul Marshall that compares the 3 investing strategies titled "A statistical comparison of value averaging vs. dollar cost averaging and random investment techniques". Indeed, it shows that value investing works best with high volatility as the 3% Signal author suggests. This makes intuitive sense, since you will make money by selling at higher highs, thus making more profit. On top of this, you will be buying new shares at lower lows. This combination ensures that you make more and pay less. That can be very potent over time as the following study shows and as the author shows in the book.
http://www.google.com/urlq=http://www.studyfinance.com/jfsd/pdffiles/v13n1/marshall.pdf&sa=U&ei=_Mc_VfzLOcTAggThpoHoAg&ved=0CEkQFjAH&usg=AFQjCNFj70UzxaeHsP5aj8FelXcRQ2TkMw
The major shortfall I see with the plan is using it within a Roth IRA, which has a limit on annual contributions. Therefore, it is conceivable that you could find yourself in a bear market with the inability to buy more because you have used up all of your bond funds and are unable to add additional funds to the account due to government regulations. I would only ever use this in a tax-advantaged account because the frequent selling could add up with short-term capital gains taxes.
Some of this won't make sense unless you have read the book, but I wanted to list it for a few reasons. First, I wanted to quell any anxieties about the plan as to whether it would work. As you can see, the author did not pull this idea out of a hat, but rather constructed it from well established techniques put forth by financial professionals and validated by academic studies. Therefore, it is conceivable that this will in fact work, though I have not confirmed the book's claims by backtesting of my own. For anyone who would like to do so, the data is readily available. Of course "past success is no guarantee of future results". Second, I think that the claims regarding the strategy as "revolutionary" and "new" are misleading. There is a clear marketing ploy by giving this "plan" a catchy name to further continue the facade. The author clearly needs to sell to fund a life abroad without a job. This is absolutely not a novel technique. I think it would have been fine to just present the ideas but I disagree with stretching the truth in the process. I was struck at how the author could constantly rail against the financial professionals for ripping you off (literally throughout the whole book), when he does the same thing by repackaging old techniques and pawning it off as his own. He pretends to be the protector of the common man, but needs to point the mirror at himself.
In short, don't waste your time. Just look up "index investing" and "value averaging". This will be all you need to know to try this on your own.
30 of 32 people found the following review helpful.
A Lot for a Little Book
By BDonnelly713
Here is what you get with this book
- A concise summary of the most important studies of behavioral finance and what they mean for investors such as confirmation bias and the brain’s tendency to see patterns that aren’t really there.
- A detailed review of the historical studies covering actively managed investments and how in most cases they have underperformed a simple low cost portfolio of index funds coupled with an analysis of the ultimate effect of increased fees on your net worth over time.
- A well written narrative covering a variety of approaches people took towards managing their investments over the last decade with selected news headlines included to remind us all of the emotional impulses that can cause us to do the exact wrong thing at the worst possible time.
- A detailed and easily understandable systematic approach to investing in the market that you can implement on your own and will cover you from the first day you invest through retirement and that should be able to help you avoid most major pitfalls to which investors succumb with a greatly increased chance of ultimately ending up with a much larger nest egg. This system as described should work regardless of whether you use a regular brokerage account, 401K, IRA, or government TSP.
- The system is well described and easy to understand and does not require any subscription to a newsletter like so many other “system” books out there.
- Full disclosure: I’ve not implemented this system myself but plan to when managing my own family’s investments as the logic presented in the book is very convincing. I work in finance and spend much of my time surrounded by financial news and the on goings of capital markets and I could find very little in the book that I felt was not well substantiated by the accompanying data and studies.
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