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Good Ol' Buy-and-Hold Plan May Be Investor's Best Bet : Money: A new study finds that most advisory newsletters, often costly, aren't any better at turning the game in your favor. It's always a gamble, an expert advises, so you might as well conserve your chips.

November 17, 1994|From Reuters

WASHINGTON — It's not high-tech. It's not cutting-edge. It's not even very cool to admit that you are a buy-and-hold investor in this day of activist money managers and stock market strategists with telephone hot lines.

But a new study shows that most investment advisory newsletters--including those that cost hundreds of dollars a year--can't beat the performance of a plain vanilla, buy-and-hold philosophy.

The particulars come from Mark Hulbert, whose Alexandria, Va.-based Hulbert Financial Digest tracks the performance of portfolios recommended by some 87 different advisory newsletters.

He tracked the annual returns of newsletter portfolios over the last 14 years--a total of 846 newsletter years--and compared them with the annual returns of the Wilshire 5,000, a broad stock index designed to replicate the broader U.S. stock market of small and large companies. The results would not make anyone run out and subscribe to a newsletter.

Market-timing advice in the newsletters translated to index-bettering returns only 32% of the time. Stock-picking newsletter advice outstripped the broad market 45% of the time.

Neither newsletter strategy--stock-picking or market-timing (where strategists tell subscribers when to get in and out of the market to reap big gains and avoid free falls)--was better, on average, than the buy-and-hold plan.

Market-timing was the worst by far, Hulbert said.

The periods when timers outstripped the market, particularly 1981, 1987 and 1990, were bear markets. The timers outdid the index not because they produced knock-your-socks-off returns, but because they as a rule keep higher cash allocations in their portfolios.

"This buffers their portfolios during declines, just as it is a drag on their performance during rallies," Hulbert wrote in the latest edition of the American Assn. of Individual Investors Journal.

What does this mean for investors? That there is no shame (or loss of return) in buying a broad index fund, investing in it regularly and ignoring stock market swings, your brother-in-law's tips and the newsletter offers cramming your mailbox. (When you eliminate the subscription costs of some of these newsletters, it makes the no-maintenance approach even more profitable by comparison.)

Two very broad-based index funds include The Vanguard Total Stock Market Index Trust (800) 622-7447, and the Schwab 1,000 Fund, (800) 627-7000.

But averages don't tell all. Hulbert points out that over the long term, a handful of newsletters has beaten the broader market and the buy-and-hold strategy.

He reports that over the past 10 years, five newsletters have bested the Wilshire 5,000 total return of 14.5% a year: The Chartist, in Seal Beach, with a 17.6% average annual return; BI Research, in Redding, Conn., with a 16.6% annual return; New York-based Zweig Performance Rating Report, with a 16.5% return; Zweig Forecast, with a 15.98% return, and the Value Line Investment Survey (available at most public libraries), with a 15.1% return.

Dan Sullivan, publisher of The Chartist, said that while he favors a buy-and-hold strategy, he believes most investors aren't patient or savvy enough to follow through.

"I have no quarrel with buy-and-hold. It's a great philosophy if you do it. However, most of the public comes in at the top and sells at the bottom of the market, after a great deal of damage has been done," he said.

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