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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
  • @DJClayworth - It would need a notable claim. I have never seen this claim about investors. I have seen it about small business. But if there was a notable claim then yes skeptics would be a good place for it. –  Mar 23 '12 at 13:53
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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. –  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" –  Mar 23 '12 at 15:00
  • @Serge - I see claims of specific investments that are losers. I am not voting to close because it is not a requirement of this site. But if you want my downvote reversed you can include a link to a claim that backs up your question. –  Mar 23 '12 at 15:21
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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
  • @Chad You must not listen to talk radio. – C. Ross Mar 23 '12 at 17:59
  • @Serge "a sample of distribution of returns relative to some general market index." How about a distribution of returns, period. What do I care what the market indices are? I care about how much return I got on my investment. – Chelonian Mar 23 '12 at 19:27
  • @C.Ross - Why would you say that... –  Mar 23 '12 at 19:33
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    @Chad Because I hear these claims on talk radio ads regularly. Usually the slightly suspect weekend investing shows heavily pushing a methodology they teach. – C. Ross Mar 23 '12 at 19:43
  • @C.Ross - It must be left wing radio. I never hear anything like that on Rush, Glenn, or our local talk shows. –  Mar 23 '12 at 19:47
  • @Chad Local right wing station actually. I guess the show type isn't as pervasive as I thought. – C. Ross Mar 23 '12 at 19:49
  • I listent to WOC Radio almost all day long and dont remember hearing anything like that. –  Mar 23 '12 at 19:56
  • Let me guess, the other 10% use 's product to do their investing? – dotjoe Mar 23 '12 at 20:43
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    Move it to Chat everybody! – MrChrister Mar 23 '12 at 23:32
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    I have only heard the 90%+ figure with respect to investments that generally ARE zero-sum, such as commodities and currency exchanges. –  May 31 '14 at 05:29
  • I would believe 99% lose money over some time period ( during a downturn my investments will lose value and I effectively have lost money) wait 2 months and they rebound and I have made money but for that small window I did lose money – sdrawkcabdear Aug 24 '16 at 21:13

7 Answers7

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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.

JTP - Apologise to Monica
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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
  • I am not totally with you on zero-sum and fair price. Where did the buyer of your S&P @ 1400 get the money from? What if next year S&P is @800? Where did all labor go? Microsoft stock has been at @30 for more than a decade. Would you say that they did not create any value during this period? –  Mar 23 '12 at 17:36
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    @Sarge - exactly, that's why its not zero-sum. – littleadv Mar 23 '12 at 17:51
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    @Serge - Investing is not about creating a non monetary value. Generally stocks are priced according to what investors feel(usually because of complex calculations) the company is worth not the good they do or provide. If it was about that the RedCross would be where Apple is and Apple would be where Lehman Brothers is. –  Mar 23 '12 at 17:52
  • How is MSFT not producing monetary value? 72B revenue, 35% margin. Doesn't sound like RedCross. It is all about expectations driven by lies, hype, fundamentals, technicals... Pick your poison –  Mar 23 '12 at 17:59
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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. – JTP - Apologise to Monica Mar 23 '12 at 19:24
  • This answer doesn't actually answer the question. Even if everything said here is true, it's still entirely possible that 90% of investors lose their money. There is really no way to answer the question without references to studies. – BlueRaja - Danny Pflughoeft Mar 23 '12 at 19:36
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    @BlueRaja-DannyPflughoeft I believe Joe's explanation is pretty good. It basically explains why there are no studies making such a claim. The question to begin with is off-topic because its speculative and non-constructive. – littleadv Mar 23 '12 at 20:06
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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. – JTP - Apologise to Monica Mar 23 '12 at 20:51
  • @littleadv care to explain how my argument proves that the game is anything but zero-sum? Poker is another zero-sum game that relies on a constant flow of new money to keep going. –  Mar 24 '12 at 02:22
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    @Serge Consider example based on your numbers. A has 1400, B has company X. A bought company X for 1400, has 0 cash and a company, B has 1400 cash. In a year B bought the company for 800 from A, from this transaction A remained with 800 (600 at loss) and B remained with the company and 600 (600 gain). So far - zero sum. But: your company produced net income, which you withdrew as dividend. Assume amount Y of dividends. That goes to A that now has (600-Y) loss, while B has 600 gain. We no longer have zero sum. We have Y additional money, that was produced by the company. – littleadv Mar 24 '12 at 02:32
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    @Serge ultimately long term investors buy companies for their value, assuming the stocks will appreciate because of the company's income, or there will be dividends. MSFT hasn't changed much during the last several years, but if you're taking into the account the 2.5% dividend yield - the investors earned money, while the prices stayed flat. – littleadv Mar 24 '12 at 02:33
  • @Serge Poker is indeed zero-sum game because no money is produced or consumed (companies may lose money, too, and then the owners will have to infuse capital). – littleadv Mar 24 '12 at 02:35
  • @JoeTaxpayer How long is sufficiently long? 10 years? Growth over time is just your opinion, not a fact. When you buy stock or fund there is somebody on the other side who doesn't believe in your ideas. Unless company pays dividends and buys back shares I don't see any relation between value creation and stock price. It is zero-sum. –  Mar 24 '12 at 02:41
  • @littleadv thanks for a good example! However, let's not put dividends in there. I view dividends as a marketing tool to attract investors looking for income. Companies can lower/raise/remove them at any point... and they do. Buybacks fall into same bucket. If you don't count this stuff would it be a zero-sum game? –  Mar 24 '12 at 02:49
  • @Joe is this the one? http://www.investorsinsight.com/blogs/forecasts_trends/archive/2009/11/03/dalbar-update-investors-still-lagging-the-market.aspx –  Mar 24 '12 at 02:52
  • this one even better http://thefinancebuff.com/dalbar-study-overstates-investors-bad-timing.html did anyone find details on how exactly they compiled the data? –  Mar 24 '12 at 03:08
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    @Serge - sure, that's an article that refers to Dalbar reports. Or you can go to my updated answer and pull a copy of the actual report. I'm sorry. I know how to separate facts from the introduction of my opinion. The market is not zero sum. Fact. That a sufficiently large group of stocks is expected to grow over time? Uh, fact. That one given stock will do so? Not so much. Any given company can go under. The S&P yields about 2%, at zero sum, the index would decline 2%/yr on average indefinitely. Halving every 36 years or so. That's not happening. – JTP - Apologise to Monica Mar 24 '12 at 03:09
  • @Joe S&P returns neither prove nor disprove anything. All you need is for new money to flow in to keep the game going. You need new buyers who expect market to grow by X% and willing to sit on it until they get what they expect. It is a self fulfilling prophecy at best, that is a fact, until it is not. –  Mar 24 '12 at 03:26
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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 own 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 03:48
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    @Serge What you describe is a Ponzi scheme. That's what Madoff is guilty of. But the stock market is not a Ponzi scheme, it doesn't take money from the new players to pay off promised returns to the old players. You can compare it to the casino, and it may be more close to it because many investors in fact do gamble, but as opposed to casinos or Ponzi scheme, stocks (mostly) have underlying value. When you buy chips you only have a small round piece of plastic. When you buy a stock - you own a portion of the company, an asset that produces additional value. – littleadv Mar 24 '12 at 03:52
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    @Serge - I have an idea - how about you cite one or two articles from known sources or authors which support your premise. From where I sit, you cannot separate fact from opinion. – JTP - Apologise to Monica Mar 24 '12 at 04:28
  • @JoeTaxpayer The Dalbar report gives no indication of the % of investors who "fail" which is what the OP is really after. The market could, mathematically, still return 3.83% to the "average investor" and still have 90% of investors lose money. (Though that would require some enormously big winners and a large amount of small losers...I don't know what is reasonable). – Chelonian Mar 24 '12 at 05:10
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    @Chelonian - Let's see, the S&P returned 9.14%, the average saw 3.83% but you imagine the distribution is so skewed that 90% saw negative returns? Serge cited an article that thought Dalbar was too pessimistic. My return has been 9.09 for that period. (My 401(k) S&P fund has a .05% fee). Add that to the mix. I am either brilliant or my return isn't quite so remarkable. You can pick, I take no offense. – JTP - Apologise to Monica Mar 24 '12 at 06:16
  • @JoeTaxpayer Well, I only imagine it, in other words, it is just a statement of mathematical possibility to emphasize that average of a set of values is sometimes misleading and perhaps seeing the whole distribution is best. I am certain 90% of investors didn't lose money--but I could imagine that the distribution could be a little surprising if there are enough small-time losers and enormous Buffet-like winners (and that is well aligned with OP's question). E.g. I'm always surprised at reports of the 20% richest Americans having 80% of the wealth. Oh, and you're probably brilliant. :D – Chelonian Mar 24 '12 at 16:04
  • @JoeTaxpayer Addendum to this point: the Dalbar report is only mutual fund investors. That fact favors the view that by averaging over all investors (day traders, forex, uninformed people who dink around with $100 now an then), we could begin to see more skewness in the distribution. (But how hard it would be to get that data, even a decent sample!) – Chelonian Mar 24 '12 at 16:07
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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. – JTP - Apologise to Monica Mar 24 '12 at 18:48
  • I'm confused because Vanguard used the zero-sum game to illustrate why index investing to continue to be successful over the long term(Link). Is this just an assumption to illustrate? – user2652379 May 03 '18 at 06:42
  • Another research I just found from Vanguard(Link). This says Assessing whether funds as a group produce nonzero estimated annual gross alpha is important. Because funds are a sub-sample of the full zero-sum-game universe(page 4) and Figures 1a and 1b show that although there are variations from year to year, median estimated annual gross alphas appear to be approximately zero, while estimated annual net alphas appear to be negative, consistent with principles of the zero-sum-game theory.(page 4) – user2652379 May 03 '18 at 08:17
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    There are aspects of the market that are, in fact, zero sum. This doesn't contradict the fact that long term, the market still grows. For this question, I'm specifically talking long term, that value is created over time. But of course, if US stocks grow from a total $30T or so (early 2016) to $60T, the gains went somewhere, one can account for the new value's distribution among investors, and the fees charged on the side. – JTP - Apologise to Monica May 03 '18 at 09:31
  • @JoeTaxpayer But according to the Figure 3a from the research, there is still negative gross alpha as much as positive gross alpha for a long term. Is this means market growth not related to losing money? – user2652379 May 04 '18 at 05:42
  • I'm sorry, this Q&A is 6 years old. I believe my original answer suffices. I'm not up for a renewed debate. – JTP - Apologise to Monica May 04 '18 at 10:49
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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
  • What's the one-paragraph-summary of Kahneman's conclusions? In narrow segments people lose money no matter what? – Xen2050 May 14 '17 at 23:12
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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.

Andrew Lauer Barinov
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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. – JTP - Apologise to Monica 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.

mhoran_psprep
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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 –  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. –  Mar 23 '12 at 15:26
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    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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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.

Parminder Singh Chahal
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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)

JTP - Apologise to Monica
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Kent A.
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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).