Letter Grades

Mark Eckman

WHEN YOU SEE an advertisement, you expect some hype. Ads for investment newsletters are, alas, no exception.

Sometimes, you hear about their unique investment process or how the newsletter regularly beats the market. Some offer one-sentence testimonials from happy subscribers. The message: You, too, can enjoy the benefits of their secret methodologies for a low, low price.

Yes, the ads are undoubtedly compelling. But you need to separate the hype from reality. Fortunately, Hulbert Financial Digest does just that—by tracking the performance of investment newsletters. In a few easy-to-read lists, you can see newsletter results for both the current year and multi-year periods, as well as how the newsletters compare to one another.

But I find it more interesting to see how the newsletters fare against the market averages. Hulbert provides the newsletter data along with seven benchmark indexes. I like to compare the newsletters to the S&P 500’s total return. The latter reflects not only share price changes, but also reinvested dividends.

For instance, the 10-year return for the S&P 500 through year-end 2019 was 13.53% a year. The best-performing newsletter gained 31.05% annually and the worst lost 2.46% a year—quite a range. Some of the newsletters outperformed the index. But the relative performance is telling. The S&P 500 would have ranked as the 15th newsletter on the 10-year list, outperforming 81% of newsletters. Looking at the five-year results, the index would have ranked eighth, besting 91% of newsletters.

Indeed, the index ranks near the top over one, three, five and 10 years, while the newsletters appear inconsistently. Subtracting the cost of a subscription from the newsletter results would make the case for indexing even more compelling.

Hulbert also shows risk-adjusted performance, as measured by the Sharpe ratio. The S&P 500 has a higher Sharpe ratio than the top-performing newsletter, meaning the S&P 500’s risk-return ratio was better. But to be fair, other newsletters had risk-adjusted returns that were superior to the S&P 500. Still, the Hulbert data suggest indexing will typically be a better strategy than following some newsletter guru.

But what if there’s a newsletter with a strategy that you really like? Will you earn the same return as the newsletter? Maybe. It depends on how diligently you follow the recommendations. Some investors trade immediately when their favorite newsletter makes a trade. But many subscribers don’t and, as a result, their returns will differ.

Even if you act on each trade recommendation, there will be a delay between when your newsletter decides to trade and when you receive the information. While the financial markets may react instantaneously to news, newsletter subscribers don’t, though Hulbert’s methodology tries to account for this.

Mark Eckman is a data-oriented CPA with a focus on employee benefit plans. His previous articles were Missing the TargetAlphabet Soup and Financial Pilates. As Mark approaches retirement, he’s realizing that saving and investing were just the start—and maybe the easy part. His priorities: family, food and fun. Follow Mark on Twitter @Mark236CPA.

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