It is often stated that 90% of traders (i.e. those who trade stocks daily, as a profession or seriously as a side job) lose to the index. Towards the end of last year, trader Jukka Lepikkö, who was still working at Nordnet at the time, gave trading data about Nordnet’s customers, which looked remarkably different. The number of successful traders would seem to be much higher than 10% – at least based on very short-term data.
Trading is always on people’s lips when social media dealing with investments are filled with even wilder annual return graphs and the stock market’s euphoria is at its strongest in a bull market.
Last year, many people made fabulous profits by trading (and even holding) and were not afraid to present them on social media. The same has been seen this year as well, when the market has continued to rise very strongly for certain stocks and investment categories.
Is this the usual story or just the tip of the iceberg? Today I thought about whether day trading in shares is worthwhile for most of us or not and what the data and studies say about it. And what is failure really – losing money or losing the index? Today, a little return to earth for all of us.
Trading data should not be taken lightly
So let’s first look at the data on trading presented by Jukka Lepikö in his Nordnet blog.
Based on the 2019 data of Nordnet’s customers, more than half of the traders had made a profit. 36% of accounts defined as traders had made a loss, i.e. 64% of customers made a profit. The average annual return of a trader was 34.34% in 2019, which was significantly higher than Nordnet’s customers on average. So it can be said that Nordnet traders made more profit on average than traditional investors.
- 80% of all traders stop trading within the first two years (a large part of the reason for this may be that trading becomes more common, especially when the stock market overheats)
- After five years, only 7% of all traders remain.
- The average private investor (who does not invest in index funds) loses an average of 1.5% units to the index. Traders lose an average of 6.5% units to the index.
- Only 1% of traders manage to stay consistently profitable after expenses and taxes.
- Traders who have been trading unsuccessfully for more than 10 years continue to trade. This indicates that it is very difficult for a person to admit his own failure.
- The popularity of trading in Taiwan fell by 25% when the lottery came to the country.
- At times when there are record-breaking lottery winnings in the countries, the trading volume of private investors decreases.
- The average trader loses money by trading.
What can be learned from the trading research results?
First of all, the correlation between lottery and trading is worrying. Interest in trading often comes from overheating of the stock market or one investment product. Someone sees the course graph of Zoom or Bitcoin and gets excited that “now I will become a millionaire in a couple of weeks”. However, as we know, the reality could not be more different when it comes to stock investing.
Many also do not understand the importance of taxation and trading costs in trading. In Finland, you have to pay taxes every time you sell something at a profit – and it should be remembered that the capital tax is currently 30%. So you can remove 30% of all return percentages in the real world while in Finland.
On the other hand, it is also extremely important to notice how important the general direction of the stock market is for the average trader. The average trader will not be left with a profit if the stock markets do not rise. Trading generally has the same problem as active funds. As the number of purchases and sales increases, the probability of failure as an investor also increases. The average person is practically terrible at predicting stock market movements in the short term.
I claim that as many studies show, more than 90% of traders fail in the long run and probably lose money trading. On the contrary, more than 90% of index fund investors succeed and get at least that 7% annual return on their assets in the long term – while sleeping well at night.
However, Jukka Lepikkö wrote well in his Nordnet blog. “This same phenomenon happens in all other competitive fields as well. It is rarely mentioned how successful that small select group of traders is, who humiliates the market year after year.”
And that’s exactly how it is. As with everything in the world, it is extremely difficult to get to the top, but there is also a reward waiting at the top. Trading is an expensive hobby, which at its worst can cost you money, mental health, and sleep. Studies one after the other prove that a considerable majority of us cannot do it, I can’t really recommend it to anyone.
Because of this, I have never started it myself, even though I have wanted to many times as a very competitive person. I value my life and my free time too much to want to think about just investing, and that’s why I’ve created a very simple and long-term investment strategy for myself, which includes buying shares once a month and not selling them for at least the next five years.
The end result is clear – most of us shouldn’t trade, but rather invest for the long term
I think the data is clear. On average, nobody should even start trading. The field is exciting and interesting and I understand very well that trading is interesting. However, studies on the correlation of e.g. lottery and trading tell us what kind of people end up in trading for the most part – people who are looking for a quick fortune, and not so much a long-term learning experience.
However, if you want to do trading in the same way as sports, there is money to lose and it won’t take you up at night, maybe trading is worth it. However, every hobby costs something. It’s also good to remember that if you feel that your social media feed is full of stock trader results and tricks that are better than each other, it’s just survivorship bias or the stock market, which has only gone up non-stop for a long time.
Furthermore, the successful are only a small minority and as in everything – social media only shows the successful and those who are doing well. The same as the few marginalized and depressed Post on Instagram and if they post, their world often seems perfect, even though the truth is something else entirely.
Finally, I must say that I agree with Jukka Lepikö’s words that at the top, however, professional traders are able to consistently beat the market.
Trading at the top is currently an extremely good way to make money, however, most of us do not have the time, ability or interest to learn so many things that we would be able to belong to the top 1%.
So it’s good to put ice in your hat if active stock trading seems like an easy way to get rich or beat the index – it’s not, although many people may have forgotten this recently.
What thoughts do trading and related statistics evoke in you?