FA Center: These 6 investment newsletters have delivered top returns in good stock markets and bad

November 27
16:05 2017

The money managers with the best track records are not necessarily the best choice for many stock investors.

When following a manager, long-term investment success is a matter of both statistics and psychology: Will an investor actually follow that manager through thick and thin? If the answer is “no” — and it often is — then following that manager could cause more harm than good.

Advisers often recommend managers who look great on paper but who require more courage and discipline to follow than their clients find tolerable. In such cases, what all too often happens is that clients throw in the towel after a big downturn, thereby suffering 100% of that manager’s downside risk and forfeiting any possibility of realizing that manager’s long-term potential.

This crucial point also applies to a broad-market index fund, since such a fund can look superior on paper but demand a too-high level of tolerance for risk. If index fund investors go to cash at the bottom of a bear market, as many do, they could make less money over time than investors in funds that appear inferior on paper but demand less risk.

Read: How your adviser’s risk aversion can hurt your portfolio

In fact, the need to take both risk and return into account is universal, cutting across the active-passive debate.

The crucial role psychology plays in investment success was brought home to me in a powerful way in the early 1990s after reading something that Peter Lynch, the legendary manager of Fidelity Magellan fund, told a group of financial advisers. His fund at that time was the best-performing U.S. equity fund over the trailing two decades, and yet he told those advisers that more than half the investors who’d ever owned the fund had lost money.

What was evidently happening was that many investors were only buying into the fund after it had rallied, then selling after a correction. This meant they bought at the high and sold at the low, which is a reliable way to lose money.

Lynch instead recommended that investors stick with his fund through thick and thin, which is indeed one way of overcoming these constant whipsaws. This doesn’t work for everyone; many skittish investors find the attendant volatility too much too take.

Read: The 7 tough questions you need to ask your financial adviser

So what’s the solution for skittish investors? One option is to only follow managers who have historically produced above-average performance in both up- and down markets. Few managers satisfy these dual criteria, but those who do tend to have both good returns and low risk — just the kind of manager that anxious investors are more likely to follow through thick and thin.

Each year for two decades I have compiled a list of investment newsletter editors who meet these dual criteria; I call it my Investment Newsletter Honor Roll.

On average, the model portfolios of the Honor Roll newsletters have been 25% less risky than the overall stock market, as measured by the volatility of their returns — even as they’ve also outperformed the newsletters that did not make my Honor Roll by 2.7 percentage points per year over the last decade.

It’s been a winning combination.

Read: Here’s how to boost returns while reducing risk

Currently, just six newsletters among those I monitor make the Honor Roll:

  • Bob Brinker’s Marketimer, edited by Bob Brinker
  • The Buyback Letter, edited by David Fried
  • Investment Quality Trends, edited by Kelley Wright
  • Investment Reporter, published by the Canadian Business Service
  • Investor Advisory Service, edited by Douglas Gerlach
  • Sound Advice, edited by Grey Cardiff

With that said, I should note that while the Honor Roll newsletters have outperformed the typical service not on the Honor Roll, they on average have not outperformed a broad stock-market index fund. But that may not be a reason to shun them. It’s only when these managers’ returns are analyzed in light of their reduced risk that their value is appreciated.

In fact, an index fund may well be an inappropriate standard against which to judge these newsletters, since few investors are actually willing to stick with an index fund through a bear market. As Claude Erb, a former fixed-income and commodities manager at mutual-fund firm TCW Group, put it to me in an email: “The people who can truly stomach the volatility of a 100% stock portfolio are either catatonic or dead.”

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email [email protected]

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