Average Investor Returns: How Much Money Can You Make?

How much does the average investor make? This is a complex question with no clear answer, as it depends on several factors, including the type of investor, their level of activity, and the performance of their investments. The average investor's salary in the US is $88,000, but this figure can vary widely, with top earners making up to $200,000 per year. Angel investors, for example, must have a minimum net worth of $1 million or an annual income of at least $200,000. When it comes to investment returns, stocks generally return 7-10% per year over long periods, but individual investors may see significantly different results depending on their investment strategies and the market's performance.

Day trading is unprofitable for most

One study found that only 3% of traders make money, with less than 1% making more than minimum wage. Another study of 20,000 new traders found that the longer someone traded, the more money they lost. Of those who traded for a single day, roughly 30% turned a profit. However, only 3% of people who traded for over 300 days made any money.

Day trading is also incredibly time-consuming. Before placing any trades, one must learn about brokerages, fees, taxes, and the financial system. Day traders must then monitor the market constantly, looking for undervalued assets, which involves a lot of reading and data analysis.

Day trading is also highly competitive. Retail investors compete against teams of professionals who trade around the clock. Additionally, most trades are made by algorithms trading automatically.

Emotions can also impact day trading performance. Traders often make decisions based on emotions such as fear of missing out (FOMO) or greed, rather than following a data-driven strategy. This can lead to poor decision-making and reduced profits.

Overall, day trading is a challenging and risky endeavour that is unlikely to be profitable for most people. It requires significant time, effort, and discipline to be successful, and even then, there is no guarantee of making money.

Overconfidence leads to overtrading

The average investor in the US makes $88,000 per year, with top earners making up to $200,000. However, this figure varies depending on the type of investor and their level of experience. For example, to become an angel investor, one must already be making at least $200,000 per year.

Now, onto the topic of overconfidence leading to overtrading. Overconfidence bias is a cognitive error that leads individuals to overestimate their abilities and knowledge, resulting in poor decision-making. In the context of investing, this can lead to excessive trading, also known as overtrading. Overconfidence is linked to higher levels of trading and lower profits in financial markets.

• Overconfidence can cause traders to believe they can control the market when they cannot. This illusion of control can lead to excessive trading as they try to influence market movements.
• Overconfidence can lead to unrealistic optimism, where traders make trades based on overly optimistic forecasts, which can result in potential losses.
• Overconfident traders may believe they can make quick profits through frequent trading. This can lead to increased transaction costs, lower returns, and a lack of discipline in trading strategies.
• Overconfidence can cause traders to ignore potential risks associated with investments. They may trade heavily in a particular sector or industry, ignoring warning signs and normalcy bias, and failing to properly assess the potential consequences.
• Overconfident traders may also ignore or dismiss contradictory evidence or information that goes against their original decisions. This can lead to confirmation bias, where they maintain positions in poorly performing investments.

To avoid the pitfalls of overconfidence bias, traders should seek diverse opinions, continuously educate themselves about the market, keep an investment journal to evaluate their decisions and identify areas for improvement, and set realistic expectations by reminding themselves that no one can predict market movements with absolute certainty.

Passive investment strategies are better

While there are many factors to consider when determining how much an average investor makes, passive investment strategies are often considered more effective in generating consistent returns. Passive investing aims to replicate market success through index funds, while active investing seeks to outperform the market by making specific investment choices. Here's why passive investment strategies may be superior:

Lower Fees and Costs

Passive investing typically involves lower fees and costs compared to active investing. Actively managed investments charge higher fees to cover the extensive research and analysis required to beat index returns. In contrast, passive investments, such as index funds, have very low fees as they do not require the same level of active management and trading. Over time, these lower fees can result in significant cost savings for investors.

Long-term Growth and Performance

Passive investing is designed for long-term growth by focusing on the overall increase in market prices over time. Historical data shows that major indices, like the S&P 500 or Dow Jones, have consistently increased in value over the years. By tracking these indices, passive investors can benefit from the compounded growth without the need for frequent trading or timing the market.

Reduced Risk

Passive investing is often considered a lower-risk approach compared to active investing. It is based on the belief that markets are efficient, and it can be challenging to consistently beat the market over the long term. By diversifying across various stocks, bonds, and other assets within an index, passive investors reduce the impact of individual stock volatility and lower the risk of significant losses.

Tax Efficiency

Passive investments, such as index funds, employ a buy-and-hold strategy, which minimizes taxable events. Active investing, on the other hand, involves more frequent trading, resulting in higher capital gains taxes. By holding investments for the long term, passive investors can benefit from tax efficiency and avoid incurring high tax liabilities.

Simplicity and Transparency

Passive investing is relatively easy to understand and implement. The strategy is straightforward – track a specific index and hold investments for the long term. Additionally, passive investments offer good transparency, as investors know exactly which stocks or bonds are included in the indexed investment. This simplicity and transparency can help investors make informed decisions and manage their portfolios effectively.

Emotional Discipline

Passive investing helps investors maintain emotional discipline by removing the urge to react to every market fluctuation. Active investing can be emotionally charged, leading to impulsive decisions that may not always be in the investor's best interest. Passive investing encourages a more patient and disciplined approach, allowing investors to focus on long-term growth rather than short-term market movements.

In summary, passive investment strategies offer a range of benefits, including lower fees, long-term growth potential, reduced risk, tax efficiency, and emotional discipline. By replicating market success and focusing on well-diversified indices, passive investors can achieve consistent returns while minimizing costs and volatility. However, it's important to remember that investing, whether passive or active, always carries some level of risk, and past performance does not guarantee future results.

Day traders lose money due to fees and taxes

The average stock investor in the US makes $108,692, with salaries ranging from $21,025 to $560,998. However, day trading, which is a very different prospect to long-term investing, can lead to significant losses due to fees and taxes.

Day trading is a fast-paced, high-adrenaline activity where individuals buy and sell stocks, options, futures, commodities, or currencies within the same day. It requires a significant time commitment and a large amount of capital to get started. Day traders need to monitor price movements throughout the trading day and make quick decisions. While it may seem appealing to quit your job and make money from day trading, the reality is that it is a challenging and stressful endeavour with a high risk of financial loss.

Day traders often incur high brokerage fees, and if they are successful, they will also face increased tax liabilities. Short-term capital gains taxes are taxed as income, whereas long-term investments held for at least a year benefit from lower tax rates. Day traders need to be aware of the various fees and taxes that can eat into their profits. These include brokerage commissions, trading software costs, and short-term capital gains taxes.

In addition to fees and taxes, day traders also face the challenge of emotional pressure, which can lead to poor decision-making. The fear of missing out, overconfidence, and loss aversion can all impact a trader's judgement and increase the likelihood of losses.

Overall, while day trading may offer the potential for high profits, it also comes with significant risks and costs. The vast majority of day traders lose money, and the pressure and financial loss can be difficult to manage. It is important for individuals considering day trading to carefully weigh the risks and ensure they have the necessary capital, discipline, and risk management strategies in place.

Most day traders would benefit from investing in the broader stock market

Day trading is a fast-paced form of investing in which individuals buy and sell securities within the same day. It is a high-stakes approach to financial markets, involving rapid buying and selling to capitalise on small price movements. While it can be lucrative, day trading is typically challenging for novices and often results in losses for newer investors.

On the other hand, investing in the broader stock market offers several benefits that make it a more attractive proposition for most day traders:

• Lower Risk: Day trading is considered a highly risky endeavour due to its fast-paced nature and the complexity of financial markets. It requires quick decisions based on real-time information, which can be overwhelming for inexperienced traders. In contrast, investing in the broader stock market can be done with a longer-term perspective, reducing the risk of short-term market fluctuations.
• Diversification: By investing in a diverse range of stocks across different sectors and industries, investors can reduce the impact of any single stock's poor performance on their portfolio. This diversification is more challenging to achieve with day trading, as it typically involves a more focused and short-term approach.
• Wealth Accumulation: Stock markets provide opportunities for individuals to grow their wealth over time. By purchasing shares, investors can participate in the financial successes of companies, building financial security for long-term goals such as retirement or education funding.
• Efficiency: Day trading demands intense focus and quick decision-making, requiring traders to constantly monitor multiple data streams and execute trades with precision timing. This high-pressure environment is not suitable for everyone and can lead to emotional decision-making, which often results in losses. Investing in the broader stock market allows for a more passive and efficient approach, where investors can take a long-term perspective and avoid the stress of constant monitoring and rapid trading.
• Liquidity: Day traders rely on highly liquid stocks to easily enter and exit positions within a single trading day. While liquidity is important for day traders, investing in the broader stock market provides access to a wider range of investment opportunities, including less liquid stocks that may offer higher growth potential over the long term.
• Cost-Effectiveness: Day trading often involves higher transaction costs due to the frequent buying and selling of securities. In contrast, investing in the broader stock market can be more cost-effective, especially when using low-fee investment vehicles such as index funds or mutual funds.
• Regulation and Transparency: Stock markets are highly regulated and transparent environments, with strict disclosure requirements for listed companies. This provides investors with a structured and regulated environment to make informed investment decisions, reducing the risk of fraud or manipulation associated with less regulated markets.

Frequently asked questions