Long-term Tests of Simple X% Rules

A subscriber requested an update of April 2015 long-term tests of simple versions of the strategy described by Jason Kelly in The 3% Signal: The Investing Technique that Will Change Your Life. We start with a general strategy targeting an X% quarterly increase in a stock fund, as follows:

1. Initiate X% rules with either 80%-20% or 60%-40% allocations to a stock fund and a bond fund.
2. If over the next quarter the stock fund increases by more than X%, transfer the excess from the stock fund to the bond fund.
3. If over the next quarter the stock fund increases by less than X%, make up the shortfall by transferring money from the bond fund to the stock fund.
4. If at the end of any quarter the bond fund does not have enough money to make up a shortfall in the stock fund: either draw the bond fund down to 0 and add cash to make up the rest of the shortfall; or, draw the bond fund down to 0 and bear the rest of the shortfall in the stock fund.
5. Consider two benchmarks: a 100% allocation to the stock fund (buy and hold); and, 60%-40% allocations to the stock and bond funds, rebalanced quarterly (60-40). Whenever adding cash to the bond fund per Step 4, add equal amounts to the benchmarks.

We consider for X% a range of 2% to 4% in increments of 0.5%. We employ stock and bond mutual funds with long histories: Fidelity Magellan (FMAGX) and Fidelity Investment Grade Bond (FBNDX). We assume there are no trading frictions when adding or withdrawing money from these funds. Using quarterly total (dividend-reinvested) returns for these funds from the first quarter of 1972 (with some early data no longer available from the source retained from the prior test) through the third quarter of 2022 (50.75 years), we find that:

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