The stock market is rightfully seen as a great way to amass a fortune and receive high returns on investments in the short and long term. But how many investors make money? We’ll look at the chances of generating wealth through the stock market.
How Many Investors Make Money?
As much as 90% of people lose money on the stock market. But this is due to bad investment strategies, such as bad market timing or emotional bias. The 10% of investors who make money on the stock market are far more rational and follow long-term, low-risk strategies.
If you’re looking to plan for your financial future and achieve financial freedom, the stock market has been a tried and tested method to generate wealth for centuries. But not everybody has the set of skills or the time to research companies and make vast sums of money on the stock market.
So, before you set your sights on becoming a billionaire like Warren Buffet, you need to be aware of the risks and the probability of making vast sums of money. Failing to understand what you’re doing can cost you a lot of money and leave you on shaky ground for your long-term financial future.
The financial brokering industry typically refers to the chances of investors making money on the stock market as “the 90-90-90 rule,” which is the common trend showing that 90% of stock traders will lose 90% of their capital within the first 90 days of opening their account.
This statistic is not very encouraging, and other professionals argue that the percentage of investors making money can be as low as 5%. But a lot of this boils down to investors in the stock market making irrational decisions by focussing too much on short-term results.
Making money on the stock market requires patience, expertise, and an emotional disconnect from the companies you’re invested in.
Historically, the stock market has shown tremendous long-term returns, with the S&P 500 growing at an average of between 65.7 and 11% annually.
According to the 90-90-90 rule, some 90% of investors tend to lose 90% of their capital investments within their first three months of trading. Other professionals may be generous and say that the unpredictability of the market gives any trading decision a 50% chance of positive returns. This is commonly referred to as “the coin toss.”
The low-ball estimation of the percentage of investors that turn a profit through trading is 5%, meaning that as much as 95% of investors will lose money.
This is largely due to a lack of expertise, patience, or unsystematic investment risks.
However, with the asset performance trend analyzed between 1926 and 2010, it has been found that both small-cap and large-cap stocks outperformed both inflation and government bonds, meaning that it is highly probable that you will make good money in the long term if you invest in low-risk stocks or funds.
If you want to avoid becoming one of the majority of investors who lose money on the stock market, you will want to follow a few tried-and-tested stock market investment strategies.
Experts in long-term investing will say that “tie in the market beats timing in the market.” You shouldn’t invest in the stock market to “get rich quick,” and holding for years and even decades onto stocks will be highly beneficial as a stock market investment strategy.
Buying and holding is far safer than trading but will not yield massive returns. However, maintaining investment for 15 years can yield an average annual return of almost 10% – so your original capital investment will have grown by almost 150% in that time frame.
Meanwhile, trading and missing out on just 10 of the best trading days within that period will only yield a 5% average annual return. Missing the best 20 days during that period will yield just a 2% annual return, and missing the 30 best days would result in an average annual loss of 0.4%.
So, it’s best to invest in low-risk stocks or funds. The annual returns may not be as high, but you stand a far lower chance of losing money on your investments.
One sure-fire way to lose money as a stock market investor is to buy stocks on your own volition, without any degree of expertise. The chances of you making money on the stock market as a casual day trader are very low if you aren’t spending all day monitoring market shifts, events and analyzing key metrics like the price to earnings (P/E) ratios.
So, rather find a broker with a good reputation to manage your investments, so they can spend all day making the smart decisions for you while you do your day job.
One of the biggest risks you can take is investing in individual stocks. You shouldn’t place all eggs in one basket and need to diversify your stock portfolio through mutual funds or ETFs.
If one of the stocks in your portfolio crashes, you will still have enough invested in other stocks for the losses to be less devastating.
As a long-term investor, businesses will pay you dividends based on earnings. Some of your small earnings may not be anything to get excited about, particularly in the early days of your investment in a smaller company.
However, if you automatically reinvest your dividends into the company’s stocks, your growth can yield almost twice as much return on your original investment. Therefore, you should sign up for an automatic dividend reinvestment strategy with your broker.
It often goes unsaid that the type of investment account you open is critical for long-term returns. Some investment accounts yield great tax advantages, which allow you to pay less in capital gains taxes or qualify for various tax deductions.
However, many of these account types, such as Roth IRAs, will not allow you to withdraw from the fund before you reach retirement age.
How Much Does The Average Person Make In The Stock Market?
According to data on stock market returns in the United States, the historical average return on stock market investments is 10% annually before inflation.
These numbers are based on a century’s worth of data collected on the S&P 500. However, this can be far higher or far lower on any given year due to the volatile nature of the stock market. Recessions, boom-bust cycles, and “black swan” events can decimate your stock portfolio. So, it’s difficult to conclusively predict how much you can expect to make in the short term.
Are you interested in investing but don’t have a social security number? Check out our article on investing without a social security number.
So, if you’re considering investing in the stock market, beware that there are many risks associated with putting your savings into individual stocks, funds, and other assets. However, if you follow a smart strategy and put your money in diverse stock portfolios and mutual funds, there is no question that you will yield impressive returns in the long term.