Long-Term Newsletter Performance: It's Not Easy to Beat the Market

    by AAII Staff

    How have investment advisers performed over the very long term?

    The occasion for asking this question is the Hulbert Financial Digest’s completion, as of this past June 30, of 28 full years of tracking the performance of the investment newsletters.

    For those of you unaware of how the Hulbert Financial Digest (HFD) calculates newsletters’ performances, the HFD independently constructs hypothetical model portfolios out of each newsletter’s advice and calculates their performances. That’s worth emphasizing, because it means that the HFD does not rely on a newsletter editor’s word about how well his recommendations have fared.

    On the contrary, using its elaborate computer simulation of the trading environment, the HFD executes all trades at prices prevailing on the day a regular subscriber could have acted; transaction costs (other than taxes) are taken into account.

    In the event a newsletter makes no specific portfolio recommendations, but does offer market-timing advice, the HFD tracks just that. It does this by constructing a hypothetical portfolio that switches between shares of the Dow Jones Wilshire 5000 index and cash according to the newsletter’s market-timing signals.

    How They Fared

    The data are presented in Table 1. It lists the 28-year performances of all newsletters the HFD currently follows for which performance data date back to June 30, 1980.

    In the event the HFD’s track record for a newsletter is based just on its market-timing advice, then this is indicated in the table with the parenthetical “timing only” following the newsletter’s name.



    Notice that Table 1 contains only 17 newsletters, a relatively low number that reflects several different factors.

    First of all, almost all of the hundreds of other newsletters that are published today were not around in 1980.

    In addition, many additional services that did exist in 1980 were subsequently discontinued. Indeed, the HFD has performance data dating back to mid-1980 for an additional 12 newsletters that either are no longer published or have stopped offering trackable investment advice.

    This attrition rate—41% of newsletters not surviving 28 years—may strike you as quite high. In fact, however, it actually is somewhat lower than for the mutual fund industry. Researchers have found that the attrition rate in the fund industry is around 5% a year.

    Few Beat the Market

    Overall, beating the market is a relatively rare phenomenon over the very long term.

    The table shows that just four newsletters (24%) were able to beat the overall stock market on a risk-adjusted basis, where the market is measured by the DJ Wilshire 5000 total-return index.

    This percentage shrinks slightly—to 21%—if we take into account the 12 services that the HFD was tracking in 1980, but which are no longer tracked, two of which were ahead of the DJ Wilshire 5000 index when they dropped off the HFD’s monitored list.

    As low as this market-beating percentage is, it is higher now than it was before the bear market began in 2000. For example, as of June 30, 2000, the point at which the HFD had exactly two decades’ worth of performance data for this group of newsletters, the percentage ahead of the DJ Wilshire 5000 on a risk-adjusted basis was just 8%.

    The reason this market-beating percentage has grown from 8% to 21% is not that the newsletter editors have become better advisers. Instead, the reason has to do with the 2000–2002 bear market, and the associated tendency of advisers to have an easier time beating the market when it is declining compared to when it is rising.

    This makes sense. When the stock market is rising, as it did seemingly inexorably during the late 1990s, the most profitable thing to do is simply buy and hold. To the extent that an adviser has any portion of his model portfolio out of the market and in cash—and most advisers do at one time or another—then chances are good that, over time, he will fall behind a buy-and-hold approach.

    By the same token, an adviser’s predisposition to hold cash will lead him to beat the market when it is falling.

    Following this logic, we should expect that the percentage of newsletters beating a buy-and-hold position over the long term to be at its lowest point at the top of a bull market, and at a significantly higher level in the wake of a bear market. And this is what we have seen, with the percentage beating the market over the period since 1980 growing from just 8% in mid-2000 to 21% today.

    What, in general, is the true likelihood of an adviser beating the market?

    The answer, as it usually does, lies somewhere in the middle. Other research, however, inclines me to believe that this likelihood is closer to the current proportion than the 8% number that prevailed in 2000.

    As a general rule, in fact, I subscribe to an 80/20 rule about those who attempt to beat the market: 80% of those who try to do better than the averages will fail over the long term, while 20% will succeed.

    Furthermore, I believe that this 80/20 rule applies to all attempts at beating the averages, regardless of the type of strategy used to beat the market. For example, as a general rule, 80% of market timers fail to add value using their strategies for jumping into and out of the market. Similarly, 80% of those advisors who try to beat the market using a stock-picking strategy will also fail.

    These are sobering percentages, to be sure. But don’t conclude from this that you should focus your market-beating attentions on other advisers besides newsletter editors. My 80/20 rule applies to them as well. For example, a similarly small proportion of the mutual funds available in 1980 have beaten the market over the subsequent 28 years.

    The conclusion I think you instead should draw from the HFD’s data: Though not impossible, it’s incredibly difficult to beat the stock market over the long term.

    Should You Even Try?

    Does this mean that you should give up trying to beat the market and instead buy and hold an index fund over the long term?

    If you are able to pick a newsletter with no better than random luck, then that would indeed seem to be the rational conclusion from the HFD’s data. However, I do think you can increase your odds of success when picking a newsletter. My research, as well as that of many others, has shown that a top performer from the past does have an increased chance of beating the market in the future—provided performance is calculated properly and measured over long periods.

    Even so, of course, there are no guarantees.

    The bottom line?

    The odds are good that you can increase your returns by simply buying and holding an index fund over the long term. If you nevertheless want to try your hand at beating those odds, bet on those advisers with market-beating records over the long term.