Paul Merriman
Sound Investing For Every Stage of Life 

The Truth About Financial Newsletters

by Paul Merriman with Richard Buck


There’s a lot of money to be made from financial newsletters that give investment advice. But the money comes from selling the newsletters, not from taking the advice.

Literally anybody can start and publish an investment newsletter. The key to success is to have a period of successful predictions that can be promoted as if it’s a sign that the publisher has talent, insight and an accurate handle on future performance.

You can claim almost anything

Despite their slick appearance, many investment newsletters are run from home. It’s easy to start a newsletter. You don’t need a college degree. You don’t need a license. You don’t need a track record. You can claim almost anything you want to as long as you aren’t actually being paid to manage money.

If you are publishing a newsletter and your recommendations flop, you can just eliminate that portfolio and start fresh. This is an extremely easy way to get rid of an inconveniently lousy track record. 

Mutual funds are heavily regulated in what they can say and promise, while investment newsletters are protected by the First Amendment to the Constitution. Even if everything in a newsletter is hogwash, it’s legal.

Still, investors pour millions of dollars into newsletter subscriptions every year. Hope springs eternal, I guess.

Fortunately, there’s an objective source of reliable information with which to judge investment newsletters. It’s The Hulbert Financial Digest, which has been tracking newsletters and their recommendations for 35 years.

In a 35th anniversary edition of The Hulbert Financial Digest this summer, publisher Mark Hulbert noted that when he began tracking newsletters in 1980, there were 28 of them. Of those 28, only nine have survived. The rest are gone.

Of the nine newsletters for which he has continuous data back to mid-1980, only two have beaten the market (measured by the Wilshire 5000 Index) on a risk-adjusted basis. One newsletter has matched the market for 30 years, and the other six have lagged behind.

[most newsletters] vastly overstate the 
probabilities of beating the market

“And even these sobering results,” Hulbert wrote, “vastly overstate the probabilities of beating the market. That’s because the large majority of the newsletters we were tracking in 1980 are no longer even published.” Almost all of those that bit the dust had failed to keep up with the market.  

The good news: Hulbert’s research indicates it’s possible to beat the market over many years. But how, in 1980, could you have known which two newsletters, out of 28 total, would succeed? The bad news: You couldn’t have known.

Hulbert emphasizes the importance of attrition rates. Of the 19 newsletters that didn’t survive from 1980 to 2015, only one was ahead of the market when it was discontinued.

“Assuming that advisors in the future will be no more successful than they were in the past, you have only a one-in-seven chance of beating the market when picking one at random,” Hulbert wrote. “This is perhaps the most important lesson to emerge from my 35 years of tracking advisors’ performance.”

Over the years I have paid attention to a lot of investment newsletters, and I have found The Hulbert Financial Digest to be the best – in fact the only – reliable source of information on them. Mark Hulbert keeps track of the performance of hundreds of recommended portfolios made up of stocks, mutual funds and ETFs.

This is extremely valuable information. Without it, all you have is promotional material, which can be misleading, to say the least. Even the newsletters that have consistently lost money continue to attract hundreds (and in some cases thousands) of subscribers.

Almost every week I get a promotional email from a mutual fund newsletter that promises huge, mind-blowing returns. The author claims to have an inside track on some of the biggest funds. To read the pitches, you’d never guess that his recommendations, carefully tracked by Hulbert, have compounded at only 6% to 7% a year.  

I have reviewed every newsletter that Hulbert tracks, and I’ve learned a great deal. Here are five examples:

ONE: Newsletters are relatively cheap, and they attract investors who are frugal. You may pay only a few hundred dollars a year instead of the thousands that an investment advisor might charge to manage your portfolio. Unfortunately, you often get what you pay for.

A newsletter doesn’t know or care anything about you or the challenges you face. In addition, newsletters tend to overestimate returns and underestimate risks.

TWO: Risks are real, while performance is elusive. Hulbert has tracked 32 “very-high-risk” newsletters with at least 15 years of performance. Eleven of them had 15-year compound losses. The average performance of the group was a compound return of only 2.9%.

THREE: The portfolios of 44 newsletters with what Hulbert defines as “average” levels of risk (90% to 110% of the Wilshire 5000 Index) did better. Only one lost money over the past 15 years. On average, this group compounded at 6%.

FOUR: Publishers of losing newsletters somehow manage to almost completely hide their failures. One of the losing high-risk portfolios actually went down at the rate of 17.5% a year. (Translation: After five years, more than half the money is gone; after 15 years you are left with less than six cents on the dollar.) Yet the publisher of that newsletter is a very popular speaker at financial conferences. It is not unusual for participants to swarm him after his presentations. Go figure.

FIVE: The most consistent returns came from recommended portfolios using Vanguard funds. These include Moneyletter, Sound Mind Investors, and The Independent Advisor for Vanguard Investors, as well as my own recommendations for Vanguard funds.

Despite this not-very-pretty picture of investment newsletters, there are some bright spots.

If you study Hulbert’s data you can find some newsletters with very profitable portfolios. You’ll also gain an understanding of their exposure to risk and their trading frequency (some very high, some very low); this will affect your costs and of course the amount of time it takes to follow their recommendations.

One piece of advice: If you want a newsletter-directed portfolio that’s actively managed (one that doesn’t simply recommend index funds), I recommend you diversify among several newsletters. Any active strategy can underperform the market for long stretches.

By diversifying in several, you’ll reduce your own risk level somewhat.

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