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One thing I do between editions of the "The Neatest Little Guide to Stock Market Investing" is collect feedback from readers. I learned over the past two years that, while many people like the firepower of the book's permanent portfolios, others wanted me to present a less stressful, methodical strategy for extracting steady profits from the market. This is a tall order, to be sure. The axiom holds that the more return an investor seeks, the more risk he or she will need to take (within reason, of course). Balancing the risk and reward of a portfolio is the art of the successful investor. Is there a low-stress way to map out the money growth we need and then keep that growth on track?
Yes! I'm proud of a new system introduced in the 2010 edition that uses a technique called value averaging to achieve a steady rate of growth. I didn't invent the approach. I took research presented in a 1988 article by Michael Edleson, who later expanded the concept in his book "Value Averaging: The Safe and Easy Strategy for Higher Investment Returns," and applied it to the new market products available today. The result is a system that I've been using in The Kelly Letter to extract 3% quarterly growth out of the S&P SmallCap 600 index of smaller companies.
Why 3% per quarter, you may wonder. That rate becomes a 12.6% annual growth rate, which is 20% higher than the S&P 500's long-term rate of 10.5%. That level of outperformance -- thanks to the magic of compounding -- turns a substantial profit over time. Yet, it's modest enough to keep the amount of new money required to a low level.
The beauty of the plan is that it works with any investment that has a chance of achieving 3% quarterly growth. A bank account wouldn't work, for instance, because it doesn't grow at all these days. You'd have to add another 3% of cash yourself to keep the account growing. That's not investing, it's saving.
No matter how you invest, on your own through a broker or through a company plan like a 401(k), you can put this new strategy to work with your money and enjoy stress-free growth that beats the market no matter what the manipulators in government and banks throw your way. Wouldn't that be nice, for a change?
I'll present details of how the plan works in a post later this afternoon.
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