by | Nov 28, 2019 | Portfolio Management

Last Updated: November 29, 2019

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Stock trading newsletters have been in existence for decades, but their effectiveness has caused much debate. These subscription service newsletters provide things like stock recommendations or current market analysis. Yet, questions have arisen around just how beneficial a somewhat cookie-cutter approach to investment advice can be for investors. In this article, 5 experts discuss the benefits and disadvantages of stock trading newsletters.

 We Need To Look At This Question From Two Angles: Price And Value

“For the longest time, tactical asset allocation was only feasible for fund managers and institutional investors. In just a decade, the landscape has fundamentally changed, and a growing number of retail investors are taking matters in their own hands. With this democratization of financial services, stock trading newsletters gain more traction. But are they worth it? To answer this question, we need to look at this question from two angles: price and value.

Costs of financial services are continuously declining. More and more brokers are jumping on the zero-commission bandwagon and revert to new revenue streams. Similarly, management fees for funds and ETFs are declining. Fees for investment advisers have been relatively stable, with about 1% of assets under management, but likely to decline due to competition from Robo-advisors. For now, these fees serve as a useful benchmark for stock-trading newsletters. Unlike commissions and advisory fees, subscription fees for stock trading newsletters are all over the place: Depending on the publisher, they may range anywhere from about $30 to $500 per month. But in a free market, prices are entirely independent of value.

Estimating the value of stock trading newsletters is much harder. In a perfect world, we could put a reliable number on the amount of money the newsletter is making us. Unfortunately, this is not possible as historical performance is not indicative of future results and investment returns come with lots of variabilities. In the absence of indisputable dollar value, all we can do is to use a step-by-step approach to determine the value the newsletter has to us.

Let’s start with checking the basics:

– People. Can we identify the people behind the newsletter? Do we know their motivations?
– Methodology. Do we understand the investment methodology? Does that approach fit into our value system?
– Results. Do we have access to a track record? Does this track record seem plausible?
– Risks. Do we understand all the risks we are getting ourselves into? Do we have a clear idea of how much we could potentially lose? Are we willing and able to take that risk?

If the answer to any of these questions is no, the newsletter probably has no value to us.

Next, we can check the value of the newsletter against the cost of hiring financial professionals:

– Is the investment strategy available as a mutual fund or ETF? If so, we should consider investing in those instead.
– Are we planning to invest more than 100 times the monthly fee? If not, we should consider hiring an investment advisor instead.

If you are still reading, you found a pretty good newsletter. It is time to ask the hardest of all questions. Is this too good to be true? Can a simple newsletter beat the market? There are many opinions on this, and advocates of the Efficient Market Hypothesis argue that no newsletter can ever improve investment results. My personal opinion is in strong support of quantitative analysis and technical trading. The stock market has several known anomalies, and it is quite possible to take advantage of these:

– Momentum. Trends established in the past tend to continue in the future. This anomaly is most pronounced in recession periods and can be used to avoid deep drawdowns.
– Mean-reversion. Trending stocks tend to revert to their mean rate of return. This anomaly is especially pronounced in times of elevated volatility and can be used to profit from taking short-term positions.
– Volatility. When volatility spikes, markets most likely go down. This anomaly can be used to scale back exposure and avoid sudden portfolio losses.

So will a newsletter help us get rich fast? Certainly not. But a well-written newsletter can help us find suitable stocks, implement better portfolio allocations, and improve our risk management. Good luck.”

Felix Bertram, Owner,

An Investor Needs To Perform A Large Amount Of Due Diligence To Avoid Getting Outright Burnt

“Stock newsletters can be effective, and there are a lot of talented individuals who have a knack for finding stocks that can provide strong growth. However, prior to signing up for one, an investor needs to perform a large amount of due diligence to avoid getting outright burnt. It’s easy for so-called gurus to skew results or even outright lie to get your money. It’s imperative you ask for a history of the newsletters ability to deliver results over a time period that cancels out short-term variance and volatility of the stock market.

They’re more than likely to only post about stocks that have performed the best. Be a contrarian, ask them what stocks they’ve picked that have gone south. Ask them what went wrong, and if anything in their original investment thesis has changed. If they are hesitant to offer this information, you’re probably better off looking elsewhere. Nobody is perfect, and a stock newsletter that has been around for any significant amount of time is going to have been wrong at some point.

The effectiveness of the newsletter is also heavily dependent on the individual investors skillset. Relying solely on outsider information to blindly purchase stocks is a recipe for disaster. The more you know, the better off you’ll be. Even if the newsletter has your best interests at heart, a stock pick or advice given by them may not be right for your individual portfolio or risk tolerance.

Overall, the effectiveness of the newsletter is dependent on the quality of the people behind it and the individual investors knowledge. Will you make money by simply signing up and blindly following advice due to the lack of your own knowledge? More than likely not. Are businesses looking to drive revenue prone to skewing results to make more money? Absolutely, so a thorough investigation into who is behind the newsletter is necessary.”

Daniel Kent, Owner, Writer, Researcher,

They Are 100% Worth It Because They Give Investors A Solid Foundation To Base Stock Buys On

 “Stock trading newsletters are a great way to stay educated and feel more confident about the stocks you purchase. They are 100% worth it because they give you a solid foundation to base your stock buys on. The cost of a few hundred dollars a year for a newsletter that gives you the foundation to buy stocks with a much higher amount of money and return is well worth it, especially when you consider without the newsletter you may have purchased stocks that ended up costing you thousands or even much more.”

Stacy Caprio, Financial Blogger, Fiscal Nerd 

In Short – No, Stock Trading Newsletters Are Not Worth It

“In short – no, stock trading newsletters are not worth it. I worked at Scottrade and TD Ameritrade for a decade and we primarily saw self-directed investors trying their hand at picking stocks. I desperately wanted to believe I was helping empower self-directed investors to take control of their financial futures and saving them on fees. Instead, I saw countless households damage their financial futures by relying on one-off advice from a relative or newsletter. I’ve summarized the reasons why over several points for you to choose from:

People tend to overestimate the upside, and underestimate the downside risk of their investments. When you’re investing on your own, there is nobody to turn to when things don’t go as you had hoped. Humans are emotional beings and when this happens, a newsletter won’t pick up the phone and tell you everything will be ok. The result is we tend to over-react with panic when things are down and get overconfident in our investment when it has gone up. There are several fascinating behavioral finance studies that illustrate this phenomenon time and time again – the do-it-yourself investor underperforms those that use an advisor.

The newsletter knows nothing about your personal situation. Relying on cookie-cutter advice can be dangerous. Implying the same stock is a good investment if you’re 80, and living primarily off of social security or if you’re 30, single, and earning $100,000 per year is reckless. Any investments you make should be done in light of your risk tolerance, time horizon, and unique financial circumstances. Ultimately your investments should be viewed as a piece of your overall financial picture, not individually. When looking at your investments – the whole is greater than the sum of its parts. This efficiency is only created when viewing the big picture and applying modern portfolio theory.

Everyone is getting the same advice at the same time. The real winners are the people that own the stock before the newsletter comes out, and the losers are those that buy it when it may be running up in price due to a favorable report or large audience.

History tells us time and time again investing is one of the few areas of our lives that we tend to do worse in, the more effort we put in. That doesn’t mean you ignore it completely, but you develop a plan and stick to it rather than spend spending your energy trying to outperform the market. Often times, people in an effort to out-perform the market simply overexpose their portfolio to risk.

Think of your investments as a cat rather than a dog and treat it accordingly. What do I mean by this? Have you ever tried to show your love to a cat by wrestling it, and scratching it behind the ears? Many dogs might appreciate this, but a cat will screech, scratch, and run away. Instead, let the cat come to you, rub against your leg, and give it time. You should think of your investments the same way – let the market come to you, be calm, and give it time. Over-doing it does more damage than good.

You don’t always know the newsletter’s motives. In particular, this applies to “free” newsletters. These tend to target the over-exuberance in a particular “hot sector” and convince people to invest in the next big thing. The problem is that the author may already own shares, and is hoping for a bump in the price when their audience goes out and buys the shares they can dump for a profit. This is illegal, yes. However I saw this happen time and time again, particularly most recently in the marijuana stock space. The truth is the appetite for these types of stocks has outweighed the availability for the, particularly in the U.S. due to the federal legal issues that still exist. That has made the space ripe for fraud and people looking to profit from the boom vulnerable. Unfortunately, the SEC is underfunded and has not been effective in protecting individual investors in this respect.

If you’re still interested in investing in individual stocks and using a newsletter to do it – my advice would be:

1) Only use a pay service. The newsletter exists for a reason – to make money for themselves, not to enrich the public. At least this way you know the business model is not to pump and dump stocks.

2) Keep a core diversified portfolio, and explore with a small portion of your overall investable assets. Consider limiting yourself to 5% or less of your liquid net worth.

3) Only invest as much as you are comfortable losing. If you go in with this mindset, hopefully you won’t panic if the investment goes down and it won’t impact what is important – your ability to achieve your larger financial goals.”

Matt Elliott, Pulse Financial Planning

In My Opinion Stock Trading Newsletters Are Nothing More Than Investment Stories

 “Stock trading newsletters provide a great resource to keep up with investment and trading ideas, but they are not all they are cracked up to be. In my opinion, stock trading newsletters are nothing more than investment stories. These newsletters have two goals. The first is to sell newsletter subscriptions and play on the consumer emotions of fear and greed.

Suggesting high returns, a way to time the market, or a peek into the proverbial crystal ball that will give you guidance on how to time the market or what the next hot stock is. Many retail investors get sucked into the idea that for $49 a year all their financial dreams will be delivered.

I think these newsletters are self-serving for the writers and ignore the financial literacy problem that society faces. Social Security strategies, Investment Fees, Understanding Medicare, When to Refinance, Roth IRA vs. Traditional IRA, How much to save for retirement? These are the topics that need to be covered for investors in order to create a sound financial foundation. These topics are not sexy so they do not sell newsletter subscriptions the same way that New Stock Investment. This is like getting in early on Amazon does.

The distractions these newsletters cause for investors do far more harm than good because it distracts investors from making sound financial decisions and causes them to change investment strategies frequently which is detrimental to their long term financial success.”

Jonathan P. Bednar, II, CFP, Paradigm Wealth Partners

 Based upon the insight from the financial experts in this article, the prevailing consensus is that stock trading newsletters should be approached with certain measured restraint. Although they can provide a foundation to invest in stocks, it’s highly advisable to perform due diligence before moving forward with an investment. Likewise, discuss investment options with a financial professional. For those investors interested in definitively understanding your trading and investing objectives, here are the top 5 investment newsletters with reviews for the likes of Capitalist Exploits and Jason Bond Picks to see the differences between the strategies offered.

Sarah Bauder

Sarah Bauder is a financial writer with over a decade of experience at numerous online publications, writing about alternative investments, retirement, US politics, world economy and more.