Hulbert on How to Boost Returns with Lower Risk

The founder of The Hulbert Financial Digest calls into question the idea that lower risk leads to lower returns, according to a recent MarketWatch article.

returns and risk

“I know, I know” Hulbert writes, “That’s directly contrary to what financial planners have always insisted. But this conventional wisdom does not fit the data.” In his review of nearly 300 investment newsletter portfolios, Hulbert found that the “riskiest services have regularly produced some of the very worst returns.”

Hulbert explains that the riskiest newsletter portfolio monitored (shown at the bottom right corner of the chart) has the “dubious distinction” of being the worst performer of the decade. Conversely, “the least-risky newsletter portfolio monitored—the one whose dot is closest to the left vertical axis—produced an annualized gain over the same period, despite incurring less than 3% of the risk.”

This is not to say, Hulbert says, that increased risk cannot produced higher returns. He concedes that for the “tiny subset of strategies that have the very best returns, it is indeed the case that you must incur more risk to pick one that holds out the prospect of making more money.”

For an investor to find such a subset, Hulbert suggests the following approach:

  • “Construct a subset of mutual funds or newsletters with risk levels no higher than the fund or newsletter you are currently following;”
  • “In that subset, pick that adviser or strategy that’s made the most money over many years—ideally, 10 to 15, longer if possible.”

The findings are significant for both investors and financial advisers, according to Hulbert, “since it means that almost everyone can increase their returns without increasing risk,” or vice versa.