We stayed up late last night reading Dr Van K Tharp’s Safe Strategies for Financial Freedom. It’s a great primer on how attain financial freedom without busting a gut. And we thoroughly recommend it to anyone hoping to free up more time for themselves and live off their investments.

Included in the book is a great strategy for determining stock market performance, which Tharp calls the “1-2-3 model.” It takes its name from the three factors that Tharp believes affect the market most: the valuation of the market, the interest rate climate as determined by the Fed, and the price of the market.

The model is very simple to follow. If all three factors are in your favor, it’s time to buy. If only two factors are in your favor, it’s time to hold. If two out of the three factors are against you, it’s time to sell. Think of it like a basic traffic light system:

Green light – buy

Yellow light – hold

Red light – sell

According to Tharp, under green light conditions (going back to 1927) stocks have risen on average 19.5% a year; under yellow light conditions stocks have risen on average 10.7% a year; and under red light conditions stocks have lost 9.7% a year.
To put it another way, the three most important questions to answer about the stock market are:

1. Is the stock market too expensive?
2. Are the Feds in the way?
3. Is the market going up?