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Many investment gurus state that majority of investors fail and then offer a proven "[insert fancy name] investment strategy" that will make you successful. The number usually starts at 90% and often goes up to 99%.

Intuitively, the number makes sense to me. After all this is a zero sum game. Taking into account all different kinds of middle-men the game is actually a negative sum game.

Are there any scientific reports supporting these claims? All I found was a bunch of anecdotes.

Edit: several people noted that losing/failing is a relative term. I agree. What would be interesting is to find research that resulted in a sample of distribution of returns relative to some general market index.

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Not sure this is on topic. Would it be better at Skeptics? –  DJClayworth Mar 23 '12 at 13:41
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-1 Because I have never heard a claim of 90% of investors failing. If you have a quote to back it up I would gladly reverse my vote. –  user4127 Mar 23 '12 at 13:54
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People generally say stuff like this as a hook to listen to their pitch about the product they sell that will buck the trend. Depending on your definition of failure, sure, that could be truthful, but probably not very meaningful. –  duffbeer703 Mar 23 '12 at 14:22
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@Chad: Google "90% investors lose their money" –  Serge Mar 23 '12 at 15:00
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Remember who say so, always have something of their's to sell, their book, ideas or something else. Take their loud mouthed advice with a bag of salt. –  DumbCoder Mar 23 '12 at 16:08
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4 Answers

The game is not zero sum. When a friend and I chop down a tree, and build a house from it, the house has value. Our labor has turned into something of value.

In theory, a company starts from an idea, and offers either a good or service to create value. There are scams that make it seem like a Vegas casino. There are times a stock will trade for well above what it should. When I buy the S&P index at a fair price for 1000 (through an etf or fund) and years later it's 1400, the gain isn't out of someone else's pocket, else the amount of wealth in the world would be fixed and that's not the case.

Over time, investors lag the market return for multiple reasons, trading costs, bad timing, etc. Statements such as "90% lose money" are hyperbole meant to separate you from your money. A self fulfilling prophesy.

The question of lagging the market is another story - I have no data to support my observation, but I'd imagine that well over 90% lag the broad market. A detailed explanation is too long for this forum, but simply put, there are trading costs. If I invest in an S&P etf that costs .1% per year, I'll see a return of say 9.9% over decades if the market return is 10%. Over 40 years, this is 4364% compounded, vs the index 4526% compounded, a difference of less than 4% in final wealth. There are load funds that charge more than this just to buy in (5% anyone?).

Lagging by a small fraction is a far cry from 'losing money.'

There is an annual report by a company named Dalbar that tracks investor performance. For the 20 year period ending 12/31/10 the S&P returned 9.14% and Dalbar calculates the average investor had an average return of 3.83%. Pretty bad, but not zero. Since you don't cite a particular article or source, there may be more to the story. Day traders are likely to lose. As are a series of other types of traders in other markets, Forex for one.

While your question may be interesting, its premise of "many experts say...." without naming even one leaves room for doubt.

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+1 - "The game is not zero sum" - that's basically it, all the rest just explaining why its so. –  littleadv Mar 23 '12 at 17:19
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Sarge - I might concede that as the change in time goes to zero, that trades taking place over that non-real time elapsed period are in fact zero sum. My answer was for the market over time. A sufficiently long period of time for there to be actual growth, and for the noise to be filtered out. My original statement remains. My explanation can always use some polishing. –  JoeTaxpayer Mar 23 '12 at 19:24
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I am away from desk. Google Dalbar. A legit study of how the average investor lags the market. Lags, but still has a positive return. –  JoeTaxpayer Mar 23 '12 at 20:51
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@Serge, say what? I view dividends as a marketing tool to attract investors looking for income. - who cares how you view it? Its there, you can't say "lets not put it there", it is there. Dividends is not a tool to attract investors, dividends is a tool for investors to earn from their investments. I earn rental property, I should ignore my rental income in ROI calculations? No, its my income and it comes from the property. Why would investors in companies ignore income the companies produce for them, just to fit your agenda? –  littleadv Mar 24 '12 at 3:48
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@Chelonian - This question has resulted in two distinct threads. "zero sum game" which is not the case with the stock market itself, but is the case in many derivatives, and the "90% lose," which isn't true either. I concede the average lags the broad market, and am open minded to studies whether it's a fraction of a percent or many percent per year. We apear to be counting angels on pins at this point. –  JoeTaxpayer Mar 24 '12 at 18:48
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For some studies on why investors make the decisions they do, check out

  • Kahneman, D., & Riepe, M. (1998). Aspects of investor psychology. The Journal of Portfolio Management, 24 , 52-65.

For a more readable, though less rigorous, look at it, also consider Kahneman's recent book, "Thinking, Fast and Slow", which includes the two companion papers written with Tversky on prospect theory.

In certain segments (mostly trading) of the investing industry, it is true that something like 90% of investors lose money. But only in certain narrow segments (and most folks would rightly want traders to be counted as a separate beast than an 'investor').

In most segments, it's not true that most investors lose money, but it still is true that most investors exhibit consistent biases that allow for mispricing. I think that understanding the heuristics and biases approach to economics is critical, both because it helps you understand why there are inefficiencies, and also because it helps you understand that quantitative, principled investing is not voodoo black magic; it's simply applying mathematics for the normative part and experimental observations for the descriptive part to yield a business strategy, much like any other way of making money.

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+1 for the Kahneman reference, he got the Nobel prize for this research on this issue. –  littleadv Mar 23 '12 at 22:00
    
Excellent explanation –  Andrew Lauer Barinov Mar 24 '12 at 5:04
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It depends on the market that you participate in. Stock markets are not zero sum as JoeTaxpayer explained. On the other hand, any kind of derivative markets (such as options or futures) are indeed zero sum, due to the nature of the financial instruments that are exchanged. Those markets tend to be more unforgiving.

I don't have evidence for this, but I believe one of the reasons that investors so often lose their money is psychology. The majority of us as humans are not wired to naturally make the kinds of rigorous and quick decisions that markets require, especially if day trading. Some people can invest time and energy to improve themselves and get over that. Those are the ones who succeed.

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I see I +1'd but missed commenting. Your observation that the derivative market is zero sum by nature is pretty important in the discussion here. There's a wealth of data supporting your second remarks, the Dalbar report I cited among them. –  JoeTaxpayer Oct 20 '13 at 16:01
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Fail? What is the standard? If you include the base case of keeping your money under a mattress, then you only have to earn a $1 over your lifetime of investing to not fail.

What about making more by investing when compared to keeping money in a checking or savings account? How could 90% of investors fail to achieve these standards?

Update: with the hint from the OP to google "90% investors lose their money" it is clear that "experts" on complex trading systems are claiming that the 90% of the people that try similar systems, fail to make money. Therefore try their system, for a fee. The statements are being made by people who have what should be an obvious bias.

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I changed subj to "lose money" to make it more specific. But, I would be fine with any research into this topic at all... For example research into claim that 99% under perform broad market –  Serge Mar 23 '12 at 15:04
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@Serge - underperform is not losing money it just means they did not do as well as they could have. So 99% of the people did not make as much money as was possible... I am sure that is true. But that is not really relevant. –  user4127 Mar 23 '12 at 15:26
    
I was going to post a similar answer. The definition of "fail" is key here. But to define "fail", really what one needs is to define the goal. Failing means not meeting that goal. And failing can be considered either binary (either your fail or you don't), or graded, such as making it to 50%, 60% or 90% of goal. It seems the OP is not sure what he is concerned about (and that's OK--part of the value here is to get these things clearer in one's mind...though in terms of solid questions on SE, it is a little problematic.) –  Chelonian Mar 23 '12 at 16:28
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