In my search to provide you with more evidence that stock investments are bad placement for most investors/traders, I found an article about the e-book “Monkey With a Pin.” It’s free so go ahead and read it.
According to the book there is a 6% annual cost for the average stock investor trying to make money. Compare that to the long-term gains in the average stock market which is around 5 percent.
From the article about the book on the Sci-Fi blog:
Comley starts with the fairly undisputed fact that 85% of fund managers fail to beat the market each year.
Most stockmarket growth in the last century was generated not by capital returns – which were more or less flat, adjusted for inflation – but from reinvesting dividends.
Looking at the average investor’s return, which is biased by our overoptimistic need to buy high and sell low, Comley’s estimate comes in at between minus one or two percent. That is, investor “skill” generally reduces returns by one or two percent. […] Roughly fund investors appear to lose 2.2% a year, stock investors about 1.3% per year. Those costs add up as well: they depend critically on your investment size, and the bid-offer spreads, but the Dalbar figure is roughly 3.8%.
The book also tried to give some answers to way people are so willing to keep investing in the stock market.
People do not want to put their capital in money market accounts since they are almost certain to give a negative yield when adjusted for inflation. However, as the article says:
Losing small amounts of money to inflation is far, far better than losing large amounts investing in overhyped stocks. The odds are against the investor, but loss aversion dictates that people will often prefer to take the gamble of a possible large loss, but a possible large gain, over a certain loss.
That is called the loss aversion bias, which is well documented in psychology.
Another fact is that people’s memories are anchored to the huge stock market gains of the 90’s and they still live on the hope to re-live that time once again.
Source: The Sci-Fi Blog