Why not just invest in the market?
"Let me start by giving you a snippet of a report that will floor you. Beat the market? Investors lag the market by so much that many call the industry a scam.   This is the 2015 year end data from a report titled Quantitive Analysis of Investor Behavior by a firm, Dalbar. It boggles the mind that the disparity could be this bad. A mix of stocks and bonds over 30 years should average 8.5% or so. Take out fees, and even 7.5% would be the result I expect. The average investor return was less than half of this. Jack Bogle, founder of Vanguard, and considered the father of the index fund, was ridiculed. A pamphlet I got from Vanguard decades ago quoted fund managers as saying that ""indexing is a path to mediocrity."" Fortunately, I was a numbers guy, read all I could that Jack wrote and got most of that 10.35%, less .05, down to .02% over the years. To answer the question: psychology. People are easily scammed as they want to believe they can beat the market. Or that they'll somehow find a fund that does it for them. I'm tempted to say ignorance or some other hint at lack of intelligence, but that would be unfair to the professionals, all of which were scammed by Madoff. Individual funds may not be scams, but investors are partly to blame, buy high, sell low, and you get the results above, I dare say, an investor claiming to use index funds might not fare much better than the 3.66% 30 year return above, if they follow that path, buying high, selling low. Edit - I am adding this line to be clear - My conclusion, if any, is that the huge disparity cannot be attributed to management, a 6.7% lag from the S&P return to what the average investor sees likely comes from bad trading. To the comments by Dave, we have a manager that consistently beats the market over any 2-3 year period. You have been with him 30 years and are clearly smiling about your relationship and investing decision. Yet, he still has flows in and out. People buy at the top when reading how good he is, and selling right after a 30% drop even when he actually beat by dropping just 22%. By getting in and out, he has a set of clients with a 30 year record of 6% returns, while you have just over 11%. This paragraph speaks to the behavior of the investor, not managed vs indexed." The market is efficient, but it is not perfectly efficient. There are entities out there that consistently, legitimately, and significantly outperform the market because of asymmetric information (not necessarily insider trading) and their competitive advantage (access to data and proprietary, highly sophisticated models)*. I say this despite most hedge funds performing worse than their respective benchmarks. For most people (even very smart people) it makes a lot of sense to invest in index funds with a reasonable asset allocation (based on desired volatility, tax situation, rebalancing methods etc.).   * The usual example that is cited is RT's  Medallion Fund because it has enjoyed quite dramatic returns. Other groups that have been successful include Citadel and Soros Fund Management. Perhaps someone has an investment objective different than following the market. If one is investing in stocks with an intent on getting dividend income then there may be other options that make more sense than owning the whole market. Secondly, there is Slice and Dice where one may try to find a more optimal investment idea by using a combination of indices and so one may choose to invest 25% into each of large-cap value, large-cap growth, small-cap value and small-cap growth with an intent to pick up benefits that have been seen since 1927 looking at Fama and French's work. Most of it is probably due to ignorance and disbelief. A few years ago, I started doing week-long trades with my IRA. For a while I would make money each time, and over the first year I had about a 20% rate of return. If you asked me if I thought I was smarter than other people in the market, I would've told you no - I just spent more time, and most people accepted a small financial penalty for not having to spend the time directly managing their portfolio. Then I made a few poor choices, and all my previous earnings disappeared quickly. In the short term, yeah, things were great, but that didn't extrapolate out. So now that I'm a few years into investing, I'm almost entirely in index funds. "Index funds do leech a ""free ride"" on the coattails of active traders.  Consider what would happen if literally everyone bought index funds.  For a company there would be no motivation to excel. Get listed; all the index funds are forced to buy your stock; now sit on your derriere playing Freecell, or otherwise scam/loot the company.  Go bankrupt. Rinse wash repeat.  This ""who cares who John Galt is"" philosophy would kill the economy dead.   Somebody has to actually buy stocks based on research, analysis and value.  Company managers need to actively fear, respect and court those people.  They don't need to be mutual-fund managers, but they do need to be somebody.  Maybe activist investors like Warren Buffett will suffice.  Maybe retirement fund or endowment managers like CalPERS or Harvard can do this.  Better be somebody!  I'm all for index funds... Just saying only a fraction of the market's capital can be in index funds before it starts into a tragedy of the commons."
"Largely, because stock markets are efficient markets, at least mostly if not entirely; while the efficient market hypothesis is not necessarily 100% correct, for the majority of traders it's unlikely that you could (on the long term) find significant market inefficiencies with the tools available to an individual of normal wealth (say, < $500k). That's what frequent trading intends to do: find market inefficiencies.  If the market is efficient, then a stock is priced exactly at what it should be worth, based on risk and future returns.  If it is inefficient, then you can make more money trading on that inefficiency versus simply holding it long.  But in stating that a stock is inefficient, you are stating that you know something the rest of the market doesn't - or some condition is different for you than the other million or so people in the market.  That's including a lot of folks who do this for a living, and have very expensive modelling software (and hardware to run it on).  I like to think that I'm smarter than the far majority of people, but I'm probably not the smartest guy in the room, and I certainly don't have that kind of equipment - especially with high frequency trading nowadays. As such, it's certainly possible to make a bit of money as a trader versus as a long-term investor, but on the whole it's similar to playing poker for a living.  If you're smarter than most of the people in the room, you might be able to make a bit of money, but the overhead - in the case of poker, the money the house charges for the game, in the case of stocks, the exchange fees and broker commissions - means that it's a losing game for the group as a whole, and not very many people can actually make money.  Add to that the computer-based trading - so imagine a poker game where four of the eight players are computer models that are really good (and actively maintained by very smart traders) and you can see where it gets to be very difficult to trade at a profit (versus long term investments, which take advantage of the growth in value in the company). Finally, the risk because of leverage and option trading (which is necessary to really take advantage of inefficiencies) makes it not only hard to make a profit, but easy to lose everything.  Again to the poker analogy, the guys I've known playing poker for a living do it by playing 10-20 games at once - because one game isn't efficient enough, you wouldn't make enough money.  In poker, you can do that fairly safely, especially in limit games; but in the market, if you're leveraging your money you risk losing a lot.  Every action you take to make it ""safer"" removes some of your profit." "I actually love this question, and have hashed this out with a friend of mine where my premise was that at some volume of money it must be advantageous to simply track the index yourself. There some obvious touch-points: Most people don't have anywhere near the volume of money required for even a $5 commission outweigh the large index fund expense ratios. There are logistical issues that are massively reduced by holding a fund when it comes to winding down your investment(s) as you get near retirement age. Index funds are not touted as categorically ""the best"" investment, they are being touted as the best place for the average person to invest. There is still a management component to an index like the S&P500.  The index doesn't simply buy a share of Apple and watch it over time.  The S&P 500 isn't simply a single share of each of the 500 larges US companies it's market cap weighted with frequent rebalancing and constituent changes.  VOO makes a lot of trades every day to track the S&P index, ""passive index investing"" is almost an oxymoron. The most obvious part of this is that if index funds were ""the best"" way to invest money Berkshire Hathaway would be 100% invested in VOO.  The argument for ""passive index investing"" is simplified for public consumption.  The reality is that over time large actively managed funds have under-performed the large index funds net of fees.  In part, the thrust of the advice is that the average person is, or should be, more concerned with their own endeavors than they are managing their savings.  Investment professionals generally want to avoid ""How come I my money only returned 4% when the market index returned 7%?  If you track the index, you won't do worse than the index; this helps people sleep better at night. In my opinion the dirty little secret of index funds is that they are able to charge so much less because they spend $0 making investment decisions and $0 on researching the quality of the securities they hold.  They simply track an index; XYZ company is 0.07% of the index, then the fund carries 0.07% of XYZ even if the manager thinks something shady is going on there. The argument for a majority of your funds residing in Mutual Funds/ETFs is simple, When you're of retirement age do you really want to make decisions like should I sell a share of Amazon or a share of Exxon?  Wouldn't you rather just sell 2 units of SRQ Index fund and completely maintain your investment diversification and not pay commission?  For this simplicity you give up three basis points?  It seems pretty reasonable to me." I read about the 90-90-90 rule aka 90% of the people lose 90% of the money in 90 days.  Anything that happens in 90 days or less is speculation (effectively gambling), not investment. And the 90-90-90 thing sounds around right for inexperienced amateurs going up against professionals in that space. I don't know anyone who actually made significant amount money by investing in stocks or other financial products except those appearing in TVs. Lots and lots and lots of people do.  I heard that people who actually encourage common people to invest in stocks are stock brokers and fund managers who actually gain by the fact that more people invest.  No. It's true that lots of people will give you advice to by specific stocks or financial instruments that will earn them comission or fees, but the basic idea of investing in the stock market is very sound; ultimately, it's based on the ability of companies to create value and pay dividends. Could you please give some valid reasons to invest in stocks or other financial market. Thank you. Well, what else can you do with your money? Put it in an interest-bearing bank account? Effectively, you'll still be investing in the stock market, the bank is just taking most of the returns in exchange for guaranteeing that you'll never lose money even temporarily. It's always a good move for risk-averse person, expecially in Europe. Because houses are not represented by number in an index. Therefor if you are risk-adverse, you will suffer less pain when house prices go down because you won't have a number to look at everyday like the S&P500 index. Because houses in Europe (Germany, Italy, Spain) are almost all made by concrete and really well done (string real marble cover, hard ceramic covers, copper pipes, ...) compared to the ones in US. The house will still be almost new after 30 years, it will just need a repaint and really few/cheap fixings. Because on the long run (20/30 years) hosues are guaranteed to rise in price, expecially in dense places like big city, NY, San Francisco, etc. The reason is simple: the number of people is ever growing in this world, but the quantity of land is always the same. Moreover there is inflation, do you really think that 30 years from now building a concrete house will be less expensive than today??? Do you think the concrete will cost less? Do you think the gasoline that moves the trucks that bring the concrete will be less expensive than now? Do you think the labour cost will be less expensice than now? So, 30 years from now building an house will be much more expensive than today, and therefor your house wil be more expensive too. On the lomng run stock market do not guarantee you to always increase. The US stock market have always been growing in the long run, but Japan stock market today is at the same level of 30 years ago. Guess what happened to you if you invested your money in the Japan stock market, 30 years ago, whilest your friend bought an hosue in Japan 30 years ago. He would now be rich, and you would now be poor. The stock market is just like any other market, but stocks are bought and sold here. Just like you buy and sell your electronics at the electronics market, this is a place where buyers and sellers come together to buy and sell shares or stocks or equity, no matter what you call it. What are these shares?  A share is nothing but a portion of ownership of a company. Suppose a company has 100 shares issued to it, and you were sold 10 out of those, it literally means you are a 10% owner of the company. Why do companies sell shares? Companies sell shares to grow or expand. Suppose a business is manufacturing or producing and selling goods or services that are high in demand, the owners would want to take advantage of it and increase the production of his goods or services. And in order to increase production he would need money to buy land or equipment or labor, etc. Now either he could go get a loan by pledging something, or he could partner with someone who could give him money in exchange for some portion of the ownership of the company. This way, the owner gets the money to expand his business and make more profit, and the lender gets a portion of profit every time the company makes some. Now if the owner decides to sell shares rather than getting a loan, that's when the stock market comes into the picture. Why would a person want to trade stocks? First of all, please remember that stocks were never meant to be traded. You always invest in stocks. What's the difference? Trading is short term and investing is long term, in very simple language. It's the greed of humans which led to this concept of trading stocks. A person should only buy stocks if he believes in the business the company is doing and sees the potential of growth. Back to the question: a person would want to buy stocks of the company because: How does a stock market help society? Look around you for the answer to this question. Let me give you a start and I wish everyone reading this post to add at least one point to the answer. Corporations in general allow many people come together and invest in a business without fear that their investment will cause them undue liability - because shareholders are ultimately not liable for the actions of a corporation. The cornerstone North American case of how corporations add value is by allowing many investors to have put money towards the railroads that were built across America and Canada. For The stock market in particular, by making it easier to trade shares of a company once the company sells them, the number of people able to conveniently invest grows exponentially. This means that someone can buy shares in a company without needing to knock door to door in 5 years trying to find someone to sell to. Participating in the stock market creates 'liquidity', which is essentially the ease with which stocks are converted into cash. High liquidity reduces risk overall, and it means that those who want risk [because high risk often creates high reward] can buy shares, and those who want low risk [because say they are retiring and don't have a risk appetite anymore] can sell shares. "It's possible to make money in the market - even millions if you ""play your cards right"". Taking the course being offered can be educational but highly unlikely to increase your chances of making millions. Experience and knowledge of the game will make you money. The stock market is a game." It might be easiest to think of stock exchanges like brokers.  If you buy a home, and your broker goes bankrupt, you still own your home, but you could not sell it without the aid of another broker.   Same with stocks, you own the stocks you buy, but you would be unable to either purchase new stocks or sell your stock holdings without an exchange. "There's several approaches to the stock market. The first thing you need to do is decide which you're going to take. The first is the case of the standard investor saving money for retirement (or some other long-term goal). He already has a job. He's not really interested in another job. He doesn't want to spend thousands of hours doing research. He should buy mutual funds or similar instruments to build diversified holdings all over the world. He's going to have is money invested for years at a time. He won't earn spectacular amazing awesome returns, but he'll earn solid returns. There will be a few years when he loses money, but he'll recover it just by waiting. The second is the case of the day trader. He attempts to understand ultra-short-term movements in stock prices due to news, rumors, and other things which stem from quirks of the market and the people who trade in it. He buys a stock, and when it's up a fraction of a percent half an hour later, sells it. This is very risky, requires a lot of attention and a good amount of money to work with, and you can lose a lot of money too. The modern day-trader also needs to compete with the ""high-frequency trading"" desks of Wall Street firms, with super-optimized computer networks located a block away from the exchange so that they can make orders faster than the guy two blocks away. I don't recommend this approach at all. The third case is the guy who wants to beat the market. He's got long-term aspirations and vision, but he does a lot more research into individual companies, figures out which are worth buying and which are not, and invests accordingly. (This is how Warren Buffett made it big.) You can make it work, but it's like starting a business: it's a ton of work, requires a good amount of money to get going, and you still risk losing lots of it.  The fourth case is the guy who mostly invests in broad market indexes like #1, but has a little money set aside for the stocks he's researched and likes enough to invest in like #3. He's not going to make money like Warren Buffett, but he may get a little bit of an edge on the rest of the market. If he doesn't, and ends up losing money there instead, the rest of his stocks are still chugging along. The last and stupidest way is to treat it all like magic, buying things without understanding them or a clear plan of what you're going to do with them. You risk losing all your money. (You also risk having it stagnate.) Good to see you want to avoid it. :)" "It's interesting that after reading this article you would make an assumption about where the stock market is headed. This article specifically says that the only way to know that is to know where interest rates are going, and for that we can guarantee no one knows.   The takeaway is this: ""The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.""  Intelligent investors should have no concern about what ""the market"" is doing. Analyze businesses, not the stock market." "That's the way the markets work in THEORY. In actual fact, markets are subject to ""real world"" pressures. That is, there are so many things going on in the market that the end of the ""Lined In"" lock up is just one of many. To produce the result you describe, traders would have to hold cash in reserve for this so-called ""contingency"" to buy at the end of the lock-up. In most cases, they wouldn't want to because of everything else that is going on.  To use a real world analogy, would you want to wait until the last possible moment before going to the bathroom? Or would you go now while you had the chance? That's what the decision about ""holding cash in reserve for a contingency"" is like." "As Dilip has pointed out in the comment, investing in commodities is to either delivery or Buy. Lets say you entered into buying ""X"" quantities of Soybeans in November, contract is entered into May. In November, if the price is higher than what you purchased for, you can easily sell this, and make money. If in November, the price is lower than your contract price, you have an option to sell it at loss. If you don't want to sell it at loss, you are supposed to take the physical shipment [arrange for your own transport] and store it in warehouse. Although there are companies that will allow you to lease their warehouse, it very soon becomes more loss making proposition. By doing this you can HOLD onto as long as you want [or as long as the good survive and don't rot] It makes sense for a large wholesaler to enter into Buy contracts as he would be like to get known prices for at least half the stock he needs. Similarly large farmers / co-operative societies need to enter into Sell contracts so that they are safeguarded against price fluctuations." It's not primarily more people investing. In the 1980s stock exchanges went from open outcry trading floors where all trades involved actually exchanging pieces of paper to electronic trading. Once that happened, it wasn't long before most trades were executed by computer programs rather than human beings, turning stocks over rapidly for very short-term profits rather than long-term investment, greatly increasing  the number of trades (and also increasing liquidity for the actual investors; it's by no means all bad). "I actually think it's you who are missing a grasp of economics. Don't confuse investments in existing companies with investments that actually boost the economy.   If I drop $100,000 into Microsoft stock, and someone else sells it, I am just putting money into their pocket. It doesn't boost the economy. If we all dump our money into the stock market it just increases the prices and ""value"" of the stocks.   The only real investors (as in contributing directly to economic growth and productivity) are angel investors, entrepreneurs, and people who invest in IPOs." "I think you're confusing risk analysis (that is what you quoted as ""Taleb Distribution"") with arguments against taking risks altogether. You need to understand that not taking a risk - is by itself a risk. You can lose money by not investing it, because of the very same Taleb Distribution: an unpredictable catastrophic event. Take an example of keeping cash in your house and not investing it anywhere. In the 1998 default of the Russian Federation, people lost money by not investing it. Why? Because had they invested the money - they would have the investments/properties, but since they only had cash - it became worthless overnight. There's no argument for or against investing on its own. The arguments are always related to the investment goals and the risk analysis. You're looking for something that doesn't exist." "This is a good question and my answer below, being the first rationale that crossed my mind, is far from fleshed-out. It's just a reply based on many books on the historical cycles of markets and it's something I've discussed at work (I work in finance).   Historically we can observe that periods of financial ""booms"" entailing high valuations of public equities tend to lead to lower returns. It's a fairly simplistic notion, but if you're paying more now for something - when it's potentially close to a high water mark - then you're returns in the short term are likely to be somewhat stunted. Returns from the underlying companies have a hard time keeping up with high valuations such that investors aren't likely to see a bountiful return in the short run."