Is it true that 90% of investors lose their money?

Question

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.

Answer 1

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, far greater than the value of a standing tree. 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.

Note - I've updated the link for the 2015 report. And 4 years later, I see that when searching on that 90% statistic, the articles are about day traders. That actually makes sense to me.

Answer 2

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.

Answer 3

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.

Answer 4

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.

Answer 5

No, 90% of investors do not lose money. 90% or even larger percentage of "traders" lose money. Staying invested in stock market over the long term will almost always be profitable if you spread your investments across different companies or even the index but the key here is long term which is 10+ years in any emerging market and even longer in developed economies where yields will be a lot lower but their currencies will compensate over time if you are an international investor.

Answer 6

The article "Best Stock Fund of the Decade: CGM Focus" from the Wall Street Journal in 2009 describe the highest performing mutual fund in the USA between 2000 and 2009. The investor return in the fund (what the shareholders actually earned) was abysmal. Why? Because the fund was so volatile that investors panicked and bailed out, locking in losses instead of waiting them out.

The reality is that almost any strategy will lead to success in investing, so long as it is actually followed. A strategy keeps you from making emotional or knee-jerk decisions.

(BTW, beware of anyone selling you a strategy by telling you that everyone in the world is a failure except for the few special people who have the privilege of knowing their "secrets.")

(Link removed, as it's gone dead)

Answer 7

Very likely this refers to trading/speculating on leverage, not investing.

Of course, as soon as you put leverage into the equation this perfectly makes sense.

2007-2009 for example, if one bought the $SPX at its highs in 2007 at ~$1560.00 - to the lows from 2009 at ~$683.00 - implicating that with only 2:1 leverage a $1560.00 account would have received a margin call.

At least here in Europe I can trade index CFD's and other leveraged products. If i trade lets say >50:1 leverage it doesn’t take much to get a margin call and/or position closed by the broker.

No doubt, depending on which investments you choose there’s always risk, but currency is a position too.

TO answer the question, I find it very unlikely that >90% of investors (referring to stocks) lose money / purchasing power. Anyway, I would not deny that where speculators (not investors) use leverage or try to trade swings, news etc. have a very high risk of losing money (purchasing power).