What Percentage of Long-Term Investors Lose Money?

Determining the exact percentage of long-term investors who experience losses is a complex question, as there is no simple, fixed number. This challenge arises from varying interpretations of what constitutes “long-term” and what precisely defines “losing money” in the context of investments. Market performance, while often positive over extended periods, does not always directly translate to individual investor outcomes. Understanding these distinctions is essential for a comprehensive view of investment success and potential pitfalls.

Understanding “Long-Term” and “Loss”

Long-term investing typically refers to holding assets for an extended duration, often cited as five years or more. Some definitions extend this to ten years, or even across multiple market cycles, emphasizing patience and resilience through economic fluctuations. This extended time horizon is considered beneficial because it allows investments to recover from short-term volatility and benefit from the power of compounding returns. It also aligns with personal financial goals such as retirement planning or saving for major life events, which inherently require multi-year horizons.

Defining “losing money” goes beyond a simple decline in nominal value. The impact of inflation is a crucial consideration, as it erodes purchasing power over time. If an investment’s nominal return does not outpace the rate of inflation, the investor experiences a real loss, meaning their money buys less than it did before, even if the dollar amount has increased. For instance, a 5% nominal return with 6% inflation results in a negative real return of -1%, effectively diminishing the investor’s purchasing power.

Historical Market Trends and Returns

Historical data for broad market indices like the S&P 500 provides insight into the general profitability of long-term investing. Since its inception in 1957, the S&P 500 has delivered an average annual nominal return of over 10%. However, when adjusted for inflation, the average real return typically ranges from 6% to 7% annually over long periods, such as the last century or since 1957. Over the last 10 years, the inflation-adjusted average return has been around 9.25%, while over 20 and 30 years, it has been approximately 7.6%.

While short-term market fluctuations are common, leading to periods of nominal losses, the long-term trend of the broader market has historically been upward. The S&P 500 has posted annual increases in approximately 70% of years since 1926. Over extended periods, the likelihood of negative real returns significantly decreases. For instance, among 5-year rolling periods on the S&P 500 since 1926, over 93% experienced positive real growth. The U.S. stock market, when considering real total returns (adjusted for inflation and reinvested dividends), has never experienced a decline over any 20-year period in history.

Despite this general upward trend, there have been notable periods where the S&P 500 experienced negative real returns over a decade or longer. For example, controlling for inflation, the S&P 500 did not surpass its January 2000 value until August 2012, reflecting a period of over a decade with no real gain for investors. Similarly, the index’s real returns were negative from 1930 to 1955 and from 1970 to November 1986. These instances highlight that while long-term investing in broad market indices generally proves profitable, specific multi-decade periods can still result in real losses, underscoring the importance of understanding the difference between nominal and real returns.

Key Determinants of Investor Performance

While broad market indices tend to show long-term gains, individual investor performance can diverge significantly from these averages. Several factors contribute to why some long-term investors might still experience losses or underperform the market. These elements often relate more to decisions made by the investor than to the inherent market trend itself.

One significant factor is investor behavior, particularly emotional decision-making. During market downturns, fear can lead to panic selling, where investors liquidate their holdings at a loss, often missing out on subsequent market recoveries. This phenomenon, known as loss aversion, means the pain of a loss is felt more acutely than the pleasure of a gain, prompting irrational decisions. Conversely, during periods of rapid growth, greed or “fear of missing out” (FOMO) can lead to chasing “hot” trends and buying assets at inflated prices, resulting in losses when corrections occur. This tendency to buy high and sell low, often influenced by herd mentality, is a common pitfall driven by emotional responses.

A lack of proper diversification also exposes investors to undue risk. Concentrating investments in a single stock, sector, or asset class can lead to significant losses if that particular investment performs poorly, even if the broader market is thriving. Diversification, which involves spreading investments across various financial instruments, sectors, and geographic regions, helps mitigate unsystematic risk, reducing the impact of a downturn in any single holding. Undiversified portfolios may experience higher volatility and potentially lower overall returns, with studies indicating that investors who fail to diversify can miss out on substantial potential returns.

Fees and costs represent another substantial drag on long-term returns. Various charges, such as management fees, fund expense ratios, trading commissions, and 12b-1 fees (for marketing and distribution), can significantly erode accumulated wealth over time. Even seemingly small annual fees, like an additional 1% in expenses, can result in a substantial difference in portfolio value over several decades due to the power of compounding. For example, a hypothetical scenario showed that a 1% difference in annual fees could lead to a $16,000 difference in portfolio value over 30 years for a $10,000 initial investment. These fees are deducted regardless of whether the investment generates positive returns, directly reducing the investor’s net gain.

The chosen investment strategy also plays a role in determining individual outcomes. Attempts at active trading or market timing, where investors frequently buy and sell based on predictions of short-term price movements, often lead to worse performance than a more passive, diversified approach. Studies have indicated that actively managed funds frequently underperform passive index funds, partly due to higher associated fees and the inherent difficulty of consistently beating the market. For instance, over a recent 10-year period, active mutual fund managers trailed passive funds consistently, with some analyses showing that most active funds fail to beat their passive rivals over a decade. Passive investing, focused on long-term holding of broad market indices, generally incurs lower costs and has historically provided more consistent returns for many investors.