NEW YORK — YOU want to make a killing in financial markets. So you subscribe to the latest in-vogue investment newsletters to see which stocks or mutual funds to buy.
Whoa! If short-term newsletter performance is any guide, you might do just as well by putting your money into a passbook savings account, many experts say. When it comes to market newsletters, the advice is simple: Be cautious.
Go with newsletters that have consistently identified top performing stock, fixed-income investments, and mutual-fund products over time. One reason, experts say, is because most mutual funds and thousands of individual stocks lag the Dow Jones industrial average and the Standard & Poor's 500 stock index in any given year. It shouldn't seem surprising that many investment newsletters, which often recommend strategies to ''beat the market,'' will also do poorly in terms of yearly performance.
Mark Hulbert, editor of the The Hulbert Financial Digest, published in Alexandria, Va., and a columnist for Forbes magazine, tracks the performance records of investment newsletters. Mr. Hulbert says that the past 12-months performance is no guide to what will happen in the next year.
The reason, he says, is because there is no direct correlation between short-term performance and future results.
For example, based on Hulbert's statistical analysis, an investor who put his hard-earned cash into market recommendations of the top five performing newsletters in 1987, based on their results for the trailing 12 month period, would have gained an average of 54.3 percent over the next 7.5 years (to mid-1995). That, he says, is far below the much larger return on a major stock market index such as the Wilshire 5000.
Had the same person gone with the bottom five performers in 1987, based on the lowest performance over the past 12-month period, he would, ironically, have done better. On average, the bottom five performers, Hulbert says, gained 150 percent over the next 7.5 years, much better than the 54.3 percent achieved by the top five performing newsletters.
The good news, he says, is that as you increase your time frame - by looking at newsletter performance over five-year periods, or 10-year periods - you are more likely to do well in terms of investment performance. His advice: Use investment newsletters that have done consistently well over time.
Hulbert currently tracks the performance of 170 investment newsletters among the some 500 published in the United States. The attrition rate for those newsletters is modest: about 5 percent a year. But that can add up. Of the first 30 newsletters he began following 15 years ago, only 19 exist.
Some newsletters are very well known, such as Morningstar Mutual Funds, published by Morningstar Inc., or Value Line Investment Survey, published by Value Line. Both Morningstar and Value Line are financial-services companies. Most others are published by individuals.
Subscriptions typically run in excess of $100 annually: ''Personal Finance,'' published in Alexandria, Va., costs $138 a year; ''InvesTech Market Analyst,'' published in White Fish, Mont., costs $175 a year. Standard & Poor's ''Outlook,'' published by McGraw-Hill Companies, costs $298 annually.
Despite their cost, investment newsletters ''can be highly useful,'' says Gene Jay Seagle, president of Tactics & Technics Consultants, a market-research firm in Weston, Conn. ''But you must be willing to check the record of the newsletter,'' he says. ''You must ask, 'How has the letter done in terms of beating market averages?'''
Mr. Seagle, who is a long-time Wall Street ''technician'' - i.e., one who studies statistical data - says average investors may be best off subscribing to a newsletter that is not published by a brokerage house, bank, or other financial institution. Financial-house letters may be touting certain products, he says.
''Newsletters are critical'' for average investors, says Arnold Kaufman, editor of Standard & Poor's newsletter, the ''Outlook.'' Kaufman says he is particularly pleased that Standard & Poor's ''five star'' rating system, which seeks to highlight outstanding stocks, has ''handily outperformed the market for the past eight years.''
Mr. Kaufman says most investors need to subscribe to only one or two newsletters. And, he says, it may be wise to pick a newsletter with a viewpoint contrary to your own.