The 3% Signal: The Investing Technique That Will Change Your Life [Paperback] [Jan 01, 2012]

by Jason Kelly

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

Genres: Finance, Business, Nonfiction

Paperback

First published February 24, 2015

Reviews

[Roy · Rating 4 out of 5]

This is a book I would gladly recommend to ordinary investors with minimal finance background, as the author lays out a simple yet effective method of managing one's investment portfolio. To sum up, the author's method works like a refined, upgraded version of dollar-cost averaging in that it guides you to mechanically and consistently sell at relative market highs and buy at relative market lows. What's better, one only needs to spend a little bit of time reviewing their portfolio once every quarter to make appropriate rebalancing, and then happily move on to other important things in life while tuning out headline-grabbing calls or market predictions from so-called investment experts. Sticking to this investment method not only helps minimize the potentially costly mistakes introduced via irrational emotions and faulty human judgements, but takes the stress off investors who then can be reasonably confident of outperforming the broader market over the long run.

[David Miller · Rating 5 out of 5]

the method recommended in this book persuaded me to begin a new separate portfolio in early 2016. So far, the new portfolio has appreciated about 20% (in 12 months). I recommend this read.

[Jamie Low · Rating 5 out of 5]

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.

[JG · Rating 3 out of 5]

The advantage of the strategy that the book shows is twofold: (i) you buy during market downturns and sell when the market rises, rather than just buying like the usual DCA does; (ii) the strategy uses a Bond ETF/Fund which gives the portfolio a lower volatility and maintains diversification. In fact the book has a section in order to improve the "selling when the market rises" and thus avoid missing the strong rebounds like the one in 2009.

For all those who like well defined and simple strategies with very few steps to follow that can even be automated, then the "3% Signal" is a great alternative to explore.

[Allen · Rating 4 out of 5]

The book is not a prize winner because it’s long and I have no patience for an author chewing the food for me but the strategy to follow is definitely a big prize winner. I’ll be trying it out for 1-3 years and seems well thought out.

[Graham Velasco · Rating 5 out of 5]

To say this book is anything less than life-altering would be to dramatically underestimate its value. The 3% Signal, by my personal hero Jason Kelly, offers investors the opportunity to actually outpace the S&P 500 (by about 2 percentage points) in an incredibly clever way. Over time, index funds of every kind have run circles around "expert" fund managers. Simply ignoring analysts, and investing in the market itself, is by FAR the best way to invest money. Not only do you outperform the experts, you save a significant amount of money in fees. The strategy is a little complex to include in this review, but I highly recommend this book to anyone who plans on investing. Like his other books, The 3% Signal includes thoroughly-developed, research-based concepts that are in my opinion invaluable. If you want to be financially free, read this book as soon as possible. The sooner you start investing, the better.

[Doug · Rating 5 out of 5]

There was always something missing in my mind and in my gut from the time-tested investment advice of dollar-cost averaging. I think Jason Kelly has nailed it in this book, which employs a simple strategy for increasing stock exposure as stock prices fall, and decreasing exposure as they rise (i.e. buying low and selling high). While human nature is to do just the opposite despite our best intentions, the 3% signal takes emotion out of the equation, and creates a system that only requires you to check and rebalance your portfolio 4 times per year. By simply rebalancing two index funds - one volatile stock fund and one stable bond fund - Kelly's claims to be able to beat a dollar-cost averaging strategy over the long term. I have to admit that after reading this book, I'm convinced he's on to something.

[Enrique B. Romano · Rating 4 out of 5]

Excellent book

I liked the book very much. I found it easy to follow even for a novice. I will be interested in seeing how it performs in real life. I did feel that there was some repetitive. However this is probably due to the system's simplicity. A good read and would recommend to anyone who is trying to make sense of how to handle our markets.

[Charles Fried · Rating 3 out of 5]

Buying low and selling high is what every investor strives for, 3sig provides this with simple arithmetic which I think is great as a core strategy.

On the downside I found the book to be rather convoluted, especially the final chapter describing various scenarios and investors. Further, the tax section is only valid for US citizens.

[Kathleen · Rating 3 out of 5]

this book is confusing and very jargon heavy, but the point of 3sig is important. it is a more stable technique than most investors use.

[Drew Shoemaker · Rating 5 out of 5]

Great investing idea that, in effect, creates a mechanical system of investment, allowing all emotion to be removed from the act.

[Vlad-Marius Griguta · Rating 2 out of 5]

In my opinion, only the first chapter is worth reading. This chapter describes the challenges of forecasting stock prices, making it almost impossible to beat the average market gains. From the second chapter, the 3% rule is introduced. This rule states that you should rebalance your porfolio quarterly to artificially keep the performance to 3%, or roughtly 10% per year. Hence, in quarters when the stocks underperform you end up buying more, and end up selling otherwise. This method is said to be beating dollar cost averaging. However, the proof is way below academic standards. The author only considers a short period of history: that for which low cost index funds were available. Also, many of the statements made in the 1st chapter refering to the downsides of timing the market are aplicable to this strategy. For example, it is said (rather correctly) that investors lose money due to panic selling. But with this rule that dictates one to buy during dips, apparently, investors turn into rational agents, "because they just have to follow the signal". You don't say.
All in all, would not recommend the read.

[Dusty Rowland · Rating 5 out of 5]

Great concept

As a passive buy and hold index investor, this concept is really intriguing. Takes the concepts of indexing, rebalancing to allocations, market volatility, human psychology and applies it to an easy to follow recipe to buy more when the market is down and take profits when market is frothy. If you’re bored with do-nothing passive index investing and want to “meddle” just a little bit every quarter, this idea is worth a read.

[Quan Bao Truong · Rating 2 out of 5]

This book recommend investors to invest in small cap stocks in US only while using the data from 2000 to 2013. To me, this is not convincing given the fact that S7%500 has been performing incredibly well in the last 15 years.

However, the book has some good point about the importance of portfolio rebalancing vs a normal DCA approach

[Glynn · Rating 5 out of 5]

An informative and enlightening read on investing using index funds. I particularly like the way it cuts through the noise and cacophony of the zero validation (Z-val) fund managers and high expense ratios. Provides a semi-automatic guide to investing with higher returns and lower fees.

[Lorraine · Rating 5 out of 5]

Excellent. Succinct and actionable.

[Adam Czarnecki · Rating 4 out of 5]

Most people with retirement investment accounts regularly send money on a set schedule and never think much more about it. That's perfectly fine, and is called "dollar cost averaging" because you are buying a set amount of stock as the value of it fluctuates, thereby averaging the cost. But I've always wanted to be a bit more involved with my investments, and the technique in this book (referred to as "value cost averaging") lets me do that and not feel like I'm going to screw something up by meddling too much.

The gist of the 3% Signal is that you still have your regular contributions going into your retirement account, but it does not buy into any risky investment. It just sits as cash or in low-risk bonds. Meanwhile, you have a primary investment (like a mutual fund). You log in a few times per year, and see if that investment has achieved 3% quarterly growth. If your investment hasn't grown that much, you use your accumulated contributions to buy more of the investment until the value of it has "grown" by 3% since the last time you logged in to check. If the investment has grown by 3% on it's own, you leave it alone. But if it's grown by more than the target--say, by 10%--you'd sell a little of it off (in this case, 7% of it). Those profits then join your regular contributions and sit on the sidelines to be used the next time you get a signal to buy.

It's an automatic way to do the whole "buy low and sell high" thing, and seems to be a proven technique, with charts that show you come out ahead of dollar cost averaging in the long run. I have implemented this strategy in all of my investment accounts. The only real drawback is that in an extremely bad quarter where the market tanks by something like 30%, you might not have enough cash to make up that difference and add 3% more. But that isn't a huge deal; you just buy what you can.

The book goes into details like that and runs through various possible scenarios, and spends a lot of time examining the many things that should be considered when deciding on an investment to buy. Even if you don't want to be involved in your investments... if you're fine with dollar cost averaging (and that's a totally valid preference)... the advice about which investments to buy into is still worth reading. The author highly favors low-cost index funds, and after reading why, it's hard to argue.

[Vendula B · Rating 3 out of 5]

Almost like passive investing approach.

[Haki · Rating 5 out of 5]

Great idea on investing. Good read, but the 5 stars are for the hope that this investing technique works as advertised.

Update (04 Dec 2024): it’s working BETTER than advertised 😁