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.
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.”
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