The “Prudent Speculator” isn’t for the faint of heart.

The investment newsletter, edited by John Buckingham, has the best average annual return over the past 20 years of the 200 advisory services monitored by the “Hulbert Financial Digest”: 16.3%, compared with 9.5% for the S&P 500, assuming dividends are reinvested.

But that highflying performance can be stomach-churning, with his performance during the downturns of the last three market cycles — since 2000 — among the very worst of his peers. During the 2007-09 bear market, for example, the service’s average model portfolio lost nearly two-thirds of its value.

Many investors don’t have the intestinal fortitude to stick with an approach after losing that much. For them, it is wiser to go with advisers whose returns may be lower but whose gyrations are smoother and therefore easier to take.

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Buckingham, in an email, conceded that his long-term approach isn’t appropriate for an investor who “bails out of his/her broadly diversified portfolio the first time a worry arises.” But he adds that “the secret to success with stocks is to not get scared out of them.”

For the past dozen years, the “Hulbert Financial Digest” has constructed an annual honor roll of those services that performed better than the average adviser in both the up and down phases of the three previous market cycles. (Please see the chart below.)

Hulburt Financial Digest

Currently, only 12 have done so. The remainder do well only when the market is going their way. Those who focus on risky small-cap growth stocks, for example, are near the top of the performance rankings when the market is rising, and near the bottom when the market is falling.

The goal isn’t to identify advisers who make the most money at all costs, but rather the ones whom risk-averse investors can live with through thick and thin. Still, it is worth noting that, over the past 15 years, the advisers making it onto each year’s honor roll over the subsequent 12 months went on to make 1.2 percentage points more a year than those who didn’t, while nevertheless incurring 25% less risk, as measured by volatility of returns.

That is a winning combination.

Only a small number of the advisers on the current honor roll try to time the stock market’s swings, and their consensus forecast is that the stock market will be higher at the end of the year than where it is now — with a correction between now and then a distinct possibility.

Bob Brinker, whose “Marketimer” service is on the honor roll, says that such a correction would be healthy, since it would “shake out the weak holders and clear the air” and thereby enable the bull market to go higher and last longer than it would otherwise.

The other advisers on the current honor roll focus on selecting stocks or mutual funds they believe will participate in any market rally as well as resist any decline. Currently, Pfizer PFE, -0.51% , the pharmaceutical giant, is liked by four of these dozen advisers; in each case the recommendation predated the company’s proposed acquisition of rival AstraZeneca AZN, +0.91% , and in each case the adviser continues to recommend the stock.

Eight more stocks are each recommended by three of the honor roll advisers: Two, like Pfizer, are drug companies: Abbott Laboratories ABT, +0.18% and Johnson & Johnson JNJ, +1.36% . Two more provide payroll services: Automatic Data Processing ADP, -2.01% and Paychex PCX, -0.14% . The others are American Express AXP, -1.16% , the financial-services firm; International Business Machines IBM, -1.72% , the technology giant; PepsiCo PEP, -1.29% , the soft-drink company; and Philip Morris International PM, -1.74% , the tobacco firm.

Two mutual funds are recommended by two of the honor roll advisers: the Fidelity Floating Rate High Income Fund FFRHX, , which invests in variable-rate bank loans that typically offer higher yields, and the Vanguard Small-Cap Index Fund VSMAX, -0.76% , the 15% of U.S. companies with the smallest market capitalizations. The funds charge annual expenses of 0.70% and 0.24%, respectively, or $70 and $24 per $10,000 invested.

Though the average honor-roll adviser over the past 12 years has made more money, with less risk, than the average adviser not making the grade, he only beat a broad index fund by 0.2 percentage point a year, on average. You might therefore conclude that switching each year into services on this honor roll isn’t worth the bother and simply buy and hold in your equity portfolio a broad stock-market index fund.

One low-cost vehicle for doing so is the Schwab U.S. Broad Market SCHB, -1.06% exchange-traded fund. It charges annual expenses of 0.04%.

Bear in mind, however, that an index fund has the same Achilles’ heel as do many of the highflying advisers: Losses during bear markets are intolerably high for many investors.

Mark Hulbert is editor of the Hulbert Financial Digest, which is owned by MarketWatch/Dow Jones. Email: mark.hulbert@dowjones.com

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