By Mark Hulbert
These top investment newsletters generated higher returns with less volatility over time.
You'll probably be better off in the long run with a lower-risk strategy that you can live with through thick and thin.
The key to performing well in the long term is avoiding large losses. That's the lesson I take away from the just-completed 2023-2024 edition of my Honor Roll of investment newsletters. The advisory services on this list were distinguished by their slow and steady performance.
This honor roll includes only those monitored investment newsletters whose model portfolios have produced above-average performance in both bull and bear markets. To identify what they are, I separated the newsletter histories over the past 16 years into what occurred in both bull and bear markets. Only the newsletters with a performance above average in each of them made it to the Honor Roll. (A more complete description of how I built the Honor Roll is available here.)
Consider two hypothetical portfolios, one that each year is divided equally between the model portfolios of that year's Honor Roll newsletters and the second among the model portfolios of non-Honor Roll newsletters. As of 2006, the first portfolio was 27% less volatile or risky than the second.
However, this less volatile portfolio performed 1.0 annualized percentage point better over the past 17 years. Needless to say, it's a winning combination to make more money with less risk.
Average can be better than average
It should come as no surprise that lower-risk newsletters get better results over time. This is due to an arithmetic quirk of compounding: to recover from a given percentage loss, a larger percentage gain is needed to break even. Therefore, it is possible to get ahead by simply cutting your losses.
As an example, consider the American stock market, which has produced an annualized return of 7.7% since 1793, according to a database constructed by Edward McQuarrie, a professor emeritus at Santa Clara University in California. Let's imagine a hypothetical investment that each year returned exactly half or worse than the stock. That is, if the stock market produced a 10% return in a given year, this hypothetical asset would have gained 5%. If the market lost 10% in a given year, this hypothetical asset would have lost 5%.
You would think that this second asset would have produced an annualized return since 1793 that was exactly half that of the real stock market. But in fact, it did better: it earned 4.2% annualized, compared to the 3.8% annualized it would have produced if it had earned half as much as the market itself. This extra 0.4 percentage point per year is what you would have earned simply by keeping your risk low.
90% of long-term success is maintaining your investment.
This is one of the secrets behind Warren Buffett's phenomenal long-term performance, according to a study that appeared in the Financial Analysts Journal in 2018 titled "Buffett's Alpha." The three authors, each from AQR Capital Management and with a strong academic pedigree, found that Buffett has beaten the market not by "luck or magic" but by "taking advantage of cheap, safe, quality stocks." In other words, instead of favoring high-risk speculative stocks that could gain a lot but also lose a lot, Buffett favors highly conservative situations. He then leverages his super-safe portfolio so that his risk roughly matches that of the market as a whole.
Woody Allen is credited with the infamous quote that "90% of life is just showing up." The investment equivalent is that 90% of long-term success is staying in the game; in other words, inverted. While investors are inevitably drawn to the excitement of high-risk strategies, they often throw in the towel when that risk translates into intolerable losses. You'll probably be better off in the long run with a lower-risk strategy that you can live with through thick and thin.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be contacted at mark@hulbertratings.com
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-Mark Hulbert
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10-28-23 1148ET
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