Money Magazine
Money Magazine's undercover financial planner

Are investment newsletters worth $300?

There are plenty of gurus out there claiming they can beat the market, and they're willing to show you how for a newsletter subscription fee of a few hundred bucks. Are they worth it?

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By The Mole, Money Magazine's undercover financial planner

the_mole_illustration.03.jpg
Have future topics for the Mole to address? E-mail him at themole@moneymail.com.
CLICK HERE

NEW YORK (Money) -- Question: Recently I've been reviewing a few financial newsletters that provide market advice. I don't trust most of them but have been intrigued by some. Would I just be wasting my money ($200 or $300 a piece) or could I actually see some better than average returns? How does the current downturn in the economy affect the advice offered by these newsletters?

The Mole's Answer: This is an easy one. You'd be much better off just throwing the money in the nearest dumpster than buying these newsletters and risking a big chunk of your nest egg in following the newsletters' advice.

So yes, you would be wasting your money, and here's why:

The hypothesis I've always believed in is that, given the hundreds of investment newsletters out there, some are going to beat the market and earn above-average returns. It's just a simple law of averages that if enough people make enough predictions, some are going to get it right. Even a broken clock is right twice a day.

But just because some got it right doesn't mean they are likely to get it right in the future. Were they skillful or was it just luck?

Track record of the best newsletters

Mark Hulbert of Dow Jones MarketWatch has been tracking investment newsletters since 1980 and writes his Hulbert Financial Digest, which is a newsletter of newsletters. He currently tracks the performance of about 180 newsletters.

While he can point out which of the newsletters has the best performance, is it really worth knowing?

At a recent investment presentation, Hulbert pointed out that if you had invested $10,000 in a portfolio in 1980 following the advice of the top-performing letter over the prior year, and then changed it each year to the top newsletter for the prior year, your investment would be worth just a few pennies.

The reason why you would have lost nearly everything is that the top-performing letter during any one year has to take a ton of risk. That risk eventually catches up with you, and by you I mean the investor.

Hulbert noted that a much better strategy would be to take the advice of the newsletters with the best ten-year track records. The sustained performance is much more meaningful.

So would following the advice of the newsletters with the best long-term track records have padded our portfolios?

If you had taken your investment advice from the newsletters with the best ten-year track records, you still would have underperformed the broad stock market indexes in the years that followed. This means you would have been better off owning the entire market and settling for the market averages. And this result didn't even include the trading costs and the tax-inefficiencies of the market newsletter strategy.

I'd love to claim that this is a new discovery, but Money Magazine wrote about this way back in 1992 in a column called Tinsel-tongued prophets. And John Allen Paulos wrote about a fun fictitious investment newsletter scam mathematically guaranteed to work in his book "A Mathematician Plays the Stock Market," which is guaranteed to work for the newsletter publisher.

Applying common sense

Maybe it's just me, but if I developed some proprietary model that allowed me to earn above-market returns by picking the winners and dumping the losers, I'm not such an altruist that I'd go through the trouble of writing a newsletter and trying to market it to investors.

It seems to me that I could make a whole lot more money by applying the strategy to my own investing. Or if my advice really earned above-market returns, I think I'd benefit more by selling it to a few institutions for millions of dollars rather than pedaling it across the country.

My advice

If you want to get rich with newsletters, then I recommend that writing a newsletter would be a much better strategy than investing your nest egg according to the advice of one.

It's human nature to believe these newsletters are offering insights that will make us rich, but actually they are far more likely to lead to underperformance. Don't waste your money and jeopardize your portfolio.

I've actually been thinking of writing my own newsletter:

Mole Newsletter - Issue 1: Buy the whole market at the lowest costs and greatest tax efficiency, then do nothing.

Mole Newsletter - Issue 2: See issue 1.

Any guess as to what issue 3 will say? My newsletter may not be exciting, but it will beat nearly all of the others out there.

The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail themole@moneymail.com.  To top of page

Send feedback to Money Magazine
Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
10 most expensive cars sold at Pebble Beach These multi-million-dollar cars sold for top dollar at this year's Pebble Beach collector car auctions. More
The world's most popular beer is ... Few people outside China have ever tasted the top-selling brew in the world. More
Transformations on the street On his days off, stylist Mark Bustos gives free haircuts to the homeless. Here are some of the transformations. More


Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.