The Kelly Signal family (3Sig / 6Sig / 9Sig)
Jason Kelly · 2015
Quarterly value-averaging strategies that pursue a fixed 3%, 6%, or 9% quarterly target on a stock ETF while using a bond ETF as a cash buffer. The book's headline claim is that the strategy forces you to buy low and sell high, quarter after quarter. The backtest says otherwise.
How the strategy works (as written)
- Pick a target quarterly growth rate (3%, 6%, or 9%) and a stock/bond ETF pair.
- Start at a fixed stock/bond split (e.g., 80/20 for 3Sig, 50/50 for 6Sig).
- Each quarter, compute the target stock-sleeve value by compounding the growth rate from the starting value.
- If the stock sleeve is below target, buy stocks with bond money. If above, sell stocks and park the proceeds in bonds.
- Apply the "30 Down" rule: if the stock ETF has fallen 30%+ from its all-time high, move all bonds into stocks immediately.
Our backtest — honest implementation
| Variant | CAGR | Max DD | Sharpe | Vol |
|---|---|---|---|---|
| 3Sig (IJR / BND) 1987-04 to 2026-04 (38.9 years) | 10.6% | -48.9% | 0.70 | 16.5% |
| 6Sig (MVV 2x mid-cap / AGG) 1987-04 to 2026-04 (38.9 years) | 16.8% | -84.2% | 0.62 | 34.7% |
| 9Sig (TQQQ 3x Nasdaq / AGG) 1987-04 to 2026-04 (38.9 years) | 26.9% | -94.3% | 0.70 | 59.0% |
For context, over the same 38.9-year period Classic 60/40 returned 9.0% CAGR at -34.7% max drawdown (Sharpe 0.81), and a plain SPY buy-and-hold returned 11.3% CAGR at -24.2% max drawdown (Sharpe 0.88). All three Kelly variants have a lower Sharpe than either benchmark.
Why we do not recommend it
Closed-system backtest flaw (the critical one)
The book's own examples assume periodic cash infusions from the investor's salary to replenish the bond sleeve. A faithful closed-system backtest — no new money, just rebalancing — is NOT what the book describes. Once the bond sleeve is depleted after a severe drawdown, there is nothing left to buy the dip with, and the strategy degenerates into leveraged buy-and-hold. Our backtests reflect that degenerate regime faithfully.
The signal line never resets downward
The target value for the stock sleeve compounds forward at 3/6/9% per quarter regardless of what the market has actually done. After a crash, the target sits far above reality, the rebalancer goes all-in on stocks, and — if there is no fresh cash — the strategy is now 100% stocks at the worst possible time.
The 30 Down rule is a capitulation trigger in disguise
By design, the 30 Down rule dumps the entire bond sleeve into stocks once the ETF is 30%+ below its all-time high. That can be a fine rule if you have dry powder coming in next month. In a closed system it is a one-way valve: all future upside is levered, all future downside is fully exposed.
Leveraged variants (6Sig/9Sig) are path-dependent traps
MVV is 2x daily mid-cap. TQQQ is 3x daily Nasdaq. Both suffer volatility decay on top of the mechanical flaws above. Our 9Sig backtest shows -94.3% max drawdown over 38 years. An investor who held through it would have needed to watch $100,000 turn into $5,700 and then wait years to break even — a level of drawdown that is psychologically and practically unsurvivable.
It does not beat simple buy-and-hold on risk-adjusted terms
Our Classic 60/40 benchmark over the same period produces 9.0% CAGR with a -34.7% max drawdown and 0.81 Sharpe. A plain SPY buy-and-hold produces 11.3% CAGR with -24.2% max drawdown and 0.88 Sharpe. All three Kelly variants have a LOWER Sharpe than both benchmarks. For 3Sig specifically: lower CAGR than SPY, twice the drawdown. There is no version of the Kelly family where the risk-adjusted outcome is worth the complexity, the tax drag, or the behavioural hazard.
Verdict
We keep the three Kelly variants listed as 'Educational only' because we implemented them honestly and we want readers to be able to compare them directly to the strategies we do endorse. But we have never run them with real money, and we recommend that you don't either. If you like value-averaging as an idea, use it for contributions (adding new money to a target), not as a rebalancing rule for a closed portfolio.
Source
Jason Kelly, "The 3% Signal: The Investing Technique That Will Change Your Life" (Plume, 2015) and later variants.