Since 1957, the S&P 500 has delivered an average annual return of 10.33%. At that pace, $100 invested back then would have grown to $80,014 by 2025 — and could top $107,000 by 2028. Despite these staggering returns, most investors never come close to earning them. In fact, most actually lose money. The gap between the market’s historical returns and an average investor’s performance isn’t about math — it’s about psychology.

Studies show that over 90% of retail traders lose money over a 12-month period. However, you’d like to think of yourself as a good investor — one that lives in the 10 percent. Unfortunately, you likely aren’t as good as you think. Even the pros underperform. Over 85% of large-cap actively managed mutual funds underperform the S&P 500 over a 10 year period.

Why does this happen? Why do traders lose money and most investors — both retail and professional — underperform? Let’s take a look at the two primary reasons why. Warning: they are extremely sobering.

Reason 1: Time in The Market > Timing The Market

If you stayed invested in the S&P 500 for a full 30 years (with no trading activity), you would have averaged a ~10% annualized return. If you missed just the 10 best trading days, that annualized return is nearly chopped in half to 5.5%. Miss the best 30 trading days? You’d be basically flat over a 30 year period. Despite this, many investors believe that they can buy low and sell high to lock in profits. But, timing the market is nearly impossible. Missing just a few big days is enough to turn a winning decade into a losing one.

Reason 2: Emotional Investing and FOMO

While conviction is a foundational tool of most successful investors, most retail investors have too much conviction. That is, they suffer from overconfidence. They believe that they “know” more than the market leading to concentrated bets that can blow up portfolios. Additionally, many investors develop FOMO (the fear of missing out). Investors may jump into last year’s hottest stock expecting future returns to match historical returns. However, it doesn’t work like this. In reality, markets often display short-term reversal, a phenomenon where extreme winners underperform in the weeks or months ahead. This is largely because investors overpay for previous winners resulting in weak future returns. 

So, what’s right for you? How can you avoid losing out on explosive gains? The harsh reality is that you likely cannot outperform the S&P 500 over an extended period of time. It may make sense to find a low cost index fund (like VOO or QQQ) to invest in and let compounding work its magic. Consistent — weekly, bi-weekly, or monthly — investing will work wonders. 

Many investors approach markets with a gambler’s mentality, seeking quick, outsized wins rather than steady compounding. This approach pairs dangerously with leverage which can magnify losses. With thousands of dollars of margin accessible on trading platforms like Robinhood at the click of a button, it’s important to have strong risk management practices in volatile markets. 

Disclaimer: this is not financial advice. Do your own research.

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