Be skeptical when it comes to the fiction of financial newsletters
If you're an involved investor, you have probably received solicitations from hyped investment newsletters or have heard radio advertisements for them.
These newsletters claim to offer insights and tips that can make you rich if you act on them.
Sound too good to be true? Well, like most things that sound that way, it is.
Of course, publishers of these newsletters have to make the benefits sound alluring, because subscriptions to them often cost several hundred dollars a year. If the content of these publications were as valuable as their editors claim, you might ask, why do they sell newsletters that benefit other investors? Why don't they keep such wealth-creating knowledge to themselves?
Or, if they actually did have world-beating market advice, why wouldn't they pitch it to institutional investors who would be willing to pay tens of millions of dollars for it?
Either way, these publications' gurus could be relaxing on their own private islands.
Another problem with these newsletters is that they convey information that's already public. Thus, because other investors also know this information, you gain no advantage, as it's already reflected in current prices. The only exception is trading on inside information, which is illegal.
What's more, the content in these newsletters often needs a strong reality check, so if you do read them, be skeptical.
Fortunately, Mark Hulbert, who publishes the Hulbert Financial Digest, a newsletter that tracks financial newsletters, is such a skeptic. He routinely examines the plausibility of claims of high returns in such newsletters.
Hulbert is renowned for applying common sense to these dazzling stories of phenomenal returns. So, when you hear of a newsletter article detailing someone's fabulous investment returns, you might want to see what Hulbert has to say about it.
For example, Hulbert recently wrote an article for Barron's in which he evaluated certain investment newsletter claims. Hulbert cites several examples of ludicrously high returns and analyzes the merits of each claim. He calls attention to the unlikelihood of three-figure annual returns for several years in a row.
Common sense tells us it would be extremely unlikely to get a 145 percent annualized return over five years, as one newsletter author claimed occurred. With this kind of return, an initial investment of $10,000 would become $882,700 during that period. Fat chance!
These newsletters tend to be focused on beating the market. The trouble is, evidence shows there's no reliable way to do that.
People who hope to gain a superior investing edge don't usually invest prudently for the long haul. Instead, like an addict, they're looking for a quick score. Quick scores mean playing the losing game of speculating: buying and selling individual securities rather than sound investing by capturing — instead of competing against — capital market returns.
Many go broke by indulging in speculative active management. At all costs, don't be tempted by seductive offerings from people I call "fortune sellers."
Instead, invest passively, capturing the market returns that are there for the taking via investment vehicles such as low-cost index funds.
If you engage in speculative active management by picking stocks and other securities, you're hoping Lady Luck will help you. Remember, if someone truly could consistently outperform market returns, do you really believe they would need to peddle publications containing such nonsense?
Tim Decker, a fee-only financial planner, is president of ISI Financial Group in Lancaster. He is the author of "The Sleep-Well-At-Night Investor" and host of the radio program "Financial Freedom," which airs at noon Saturdays on WHP-AM 580. Contact him at www.isifinancialgroup.com.
This content is based upon information believed to be accurate by ISI Financial Group Inc. However, it should not be relied upon for legal or accounting purposes. Past performance is not indicative of future performance. Investments involve risk, including the possible loss of principal. Always seek professional advice before making any financial or legal decisions.