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Sounds like a dumb question, but hear me out.

The stock market averages about 10% each year (depends on how you measure but about 8% - 10%). Which means it should be easier to make money than lose money, because buying random stocks and random times (assuming you can always buy/sell at market price) should average you about 10% each year.

And yet an estimated ~80% of people lose money in the stock market. How is this possible? "Because people buy high and sell low" is not a valid argument because its really hard to time peaks. You can imagine trying to make money by shorting the SPX on peaks, which is pretty hard compared to just buying.

So whats going on?

Edit: the 80% figure is from my Chinese stock brokerage, which sends an annual report comparing me to the rest of their millions of users. It shows a graph of amount of people with what returns, and 80% are less than 0

Or you can do a quick google search: "percent of people who lose money in the stock market", and it says 80%-90% from many different sources

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    Please provide source for: "~80% of people lose money".
    – Pete B.
    Commented Mar 24, 2021 at 17:29
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    I think you are misunderstanding the nuance between "losing money" and "underperforming" an index.
    – quid
    Commented Mar 24, 2021 at 17:37
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    "The stock market averages about 10% each year (depends on how you measure but about 8% - 10%)." I don't think that means what you think it means
    – Kevin
    Commented Mar 24, 2021 at 17:45
  • If the stock market goes up 10% a year on average and approximately of people lose money in it then the remaining 20% of people are making a wad of money. Now, all you need to do is to figure out how to be in the 20% cadre. I haven't been able to figure out how all of those chumps in the 80% group who work, save and invest for a lifetime manage to retire with seven figure portfolios. Can you help me understand that? Commented Mar 24, 2021 at 18:09
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    It is easy to buy high and sell low. Buy when everybody is enthusiastic and sell when things are looking bleak. This is how many people lose money in the stock market. Also stocks markets typically do not return 8-10%. That is for the S&P500 and the US has done quite well over the last century. Other stock markets are more like 5% which makes actually losing money much more likely. Also stock markets are highly skewed. A few stocks give huge gains but many manage to actually lose money. And that is not yet touching on brokerage fees
    – Manziel
    Commented Mar 24, 2021 at 18:20

1 Answer 1

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I'm not 100% sure it's true that most people lose money in investment markets. Many do, though, and there are reasons for that.

Tons of reasons

There are lots of ways to "be in" the stock market, through all sorts of investment vehicles and products with radically different characteristics and purposes. It might be hard to "lose money" (the quotation marks are there because even that seemingly obvious phrase can be thought of in various ways relevant to investing) when investing in a well-managed index fund over a period when that index increases in value. But not everyone invests that way! Writing naked puts is pretty risky, even if the market overall does well.

Your assertions seem a bit off, and are blurring the details

Let's leave aside specific numbers like "80% of people lose money" because it's hard to define a number like that really precisely. But we'll take it all as a given:

  • The market averages 10% per year

If a market averages 10% growth per year over ten years, there are a lot of different numbers that might produce that average. It can post stronger gains in some years and losses in others, with an overall average that's about 10%. But in that case, when those gains and losses occur, when you started investing, and how extreme specific gain and loss years were has a huge impact on whether or not you gained or lost any money.

Percentages are also tricky because they are relative figures: if you placed all of your investments at the beginning of Year One, a 40% gain in Year Two following a 40% loss in Year One still leaves you with less money than you started with.

  • [B]uying random stocks and random times

Markets aren't homogenous. In this case that means that gains and losses are not distributed evenly across all different possible investments: Google, Amazon and Apple may post very strong gains which are enough to produce an average gain even when a huge number of other companies are flat or lose value-- your shares in Juicero don't enjoy any benefits of a positive average return.

That skews the odds against the random investor: there might be a greater number of losing investments than there are growing investments, in which case you're far more likely to invest in a loser than a strong winner. You might even end up with nothing but losers! You can try this approach with penny stocks without risking too much of your money and see how well you do.

Even without that, people generally are terrible at randomness. Asking a person to choose a thousand random numbers from 1 to 100 will rarely produce an even distribution. And even if people were good at behaving randomly, that tends to not be how people invest. Lots of people invest when they hear about a hot stock pick, which tends to be a bit late: consider all of the people who invested in GameStop once that whole situation hit news headlines. People really do buy high and sell low in situations like these, and an expensive mistake can wipe out a lot of gains.

Finally, many people are effectively in the worst situation with regard to choosing investments: they don't behave randomly, but don't have a deployable, realistic strategy leading to a desired outcome (or the knowledge to create and follow one) either. For a lot of people that means they make decisions that are systematically biased in any number of ways, but not towards the goals they have.

  • "Because people buy high and sell low" is not a valid argument because its really hard to time peaks

I think that this is a mistaken position. That it is difficult to consciously time market peaks is irrelevant to this point-- I don't think anyone is suggesting that people are able to time the market and then are just choosing to buy high and sell low. Lots of people hear about a stock and then invest in it because it's a "hot stock", even though stocks may only become "hot" after a great deal of growth has occurred and/or increasing interest pushes the price higher. And then if the price drops, many people panic (or rationally decide to cut their losses; either way) and sell their shares off so as to limit how much they lose.

It doesn't matter if people knowingly buy at the peak and sell at the trough. Buying on the upswing and selling on the downswing can leave you with a loss. People generally invest with the expectation that they will end up with more money than they had when they started. Their behavior can easily end up producing the opposite, and empirically there have been many, many situations in which lots of people have wound up in a situation of having bought high and sold low. That's definitely a way to lose invested money!

People like greater gains

If you want to dump your investment money into low- or no-fee index funds, then it legitimately is (well, might be) easier to make money than lose it over many time horizons. But a lot of people don't do that. It's boring and slow. Doing more trades of specific investments can seem exciting and quick! Everyone would prefer to turn $10,000 into $2,000,000 (a la GME) rather than into $11,000. People are often dazzled by what they perceive to be amazing upside potential and focus on that rather than on limiting their downside potential.

People invest with different goals

If you are 25 years old and have a portfolio focused on growth, funded by money you can afford to invest, you might be able to afford to ride out down markets until gains are great enough to reach net growth. If you have a portfolio you are relying on to produce immediate income (as is the case for many retirees, for example) you might need need to sell positions immediately, even if that locks in a loss.

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    An extra thing which perhaps ties into the last one: downswings correlate with other trouble. If you lose your job and need to unlock some cash, you sell at the rate the market gives you. And you're more likely to have lost your job in a recession than in a boom, so that rate is less likely to be good for you.
    – Josiah
    Commented Mar 24, 2021 at 22:39

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