Are investment newsletters worth $300?

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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?

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.

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.

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.