Do day traders beat the stock market?
You may have heard stories of people becoming successful day traders after minimal effort, and although that looks incredibly enticing, the reality is that most day traders end up losing money over the long run.
Studies show that over 97% of day traders end up losing money in the long run…
Yup, Hollywood has done everyone dirty. Especially since many newer investors have this mental image that the stock market is all about finding the right stock at the right time and hoping it makes them a millionaire overnight.
But that couldn’t be further from the truth. And it’s why many confuse investing with gambling and hold themselves back from building wealth by dismissing it as a rich person game.
Investing doesn’t have to be risky or complicated.
The best way to get started is by taking the simplest route. Rather than trying to outguess the markets, one of the most effective and safest ways to invest is to put your money in index funds and let the markets do the work.
The benefits of Index Funds
Index funds are low-cost, diversified investments that track a basket of stocks, such as the S&P 500. This means that by investing in index funds, you invest in a little bit of everything without doing hours of research or trying to guess which stocks will do better than others.
For example, by investing in an S&P 500 index fund, you are investing in all of the top 500 U.S. public companies. And the cool thing about investing in the S&P 500 is that if a company starts to massively fumble, turn unprofitable, and lose market valuation, it will get booted out and replaced with a better company. All without you having to do anything.
You can read more about index funds in my “Build a “Set It and Forget It” Portfolio” article.
S&P 500 Historical Returns
The unfortunate truth is that most professional investors (who have dedicated their lives to trying to outperform the stock market) have failed to beat the S&P 500 over long periods.
Over the past two decades, up until December 2020, fewer than 10% of actively managed US stock funds were able to outperform the S&P 500.
Despite having access to sophisticated strategies, research, and analysis, the vast majority of professional investors cannot manage to outperform the market index.
The S&P 500 has provided an average return of 10.67% annually since 1957. Even though that might not seem like much at first, it can add to some serious wealth over time. Thanks to the compound interest.
The Compound Interest “Magic”
Many people underestimate the power of compound interest over long periods. The longer compound interest works in your favor, the more powerful it gets.
Compound interest is the most powerful force in the stock market but also the most misunderstood.
What is compound interest? To put it simply, it is your profits making you more profits.
The compounding effect starts small, but it becomes stronger and more powerful as time passes.
Time + Compound Interest = Enormous Wealth
Example: Investing $500 monthly for 35 years with an average return of 10% yearly:
Blue = $500/month contributions
Green = Your profits making more profits (compound %)
Final Thoughts:
Day trading can be an exciting way to get involved in the stock market, but it is essential to remember that it is a high-risk activity and the vast majority of day traders lose money.
Investing in index funds is a great way to take advantage of the stock market without taking on excessive risk or playing the stock-picking game.
You can then focus on increasing your income and enjoying life rather than trying to predict what the stock market will do or what stocks might outperform others.
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Want to keep learning? Check out some of my other blog posts:
As Always: Buy things that pay you to own them.
-Josh
Blog Post: #079
