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10 Reasons Why The Stock Market Won’t Make You Rich

Ever since I was a kid I was fascinated by the stock market. I thought if there was a place a poor kid like me could get rich that was it. I ended up working as a prop trader for a few years and made a good living out of it and I can tell you from first hand experience that the stock market won’t make you rich.

We made money with tons of leverage and ultra fast execution but the average trader/investor is lucky to get 8% minus inflation on his small amount of savings.

The only guys that get rich are rich already or have access to tons of leverage. The guys trying to sell you their trading systems deserve a slow death, they’re the worst kind of frauds. Anyone with a consistent system would be a trillionaire. This article is not designed to be discouraging but to manage your expectations on what to expect from the market. Check it out:

1) Inflation

  • Inflation, otherwise known as the expansion of the money supply will take 3% a year off of your return

2) Capital Gains Taxes

  • Capital gains taxes are taxes applied to any profit you make on an investment/trade
  • Capital gains can range from a percentage of your ordinary income tax bracket all the way to the entirety of your income tax bracket depending on the duration of the investment, your annual income and your country of residence
  • Capital gains taxes will generally take 10% to 50% of your return

3) MER

  • Mutual Funds are a fund composed of stocks picked by an advisor that attempts to beat the S&P 500 in a yearly rate of return
  • The majority of funds underperform the S&P and charge you an MER (Management Expense Ratio) of approximately 2.5% a year for the privilege of  having them mismanaging your money
  • Many funds will also charge you front-end loading fees, back-end loading fees or other miscellaneous fees

4) Trading Fees and Slippage

  • Active trading is the buying and selling of investment products, usually stocks, on a shorter time frame than investing
  • It’s the fastest and easiest way to lose money in the stock market
  • The more often you trade the less likely you are to make money due to trading fees and slippage
  • Slippage is the difference between the price you want and the price you actually get
  • For example, on a volatile stock like AAPL you can place an order to buy 100 shares at $500.00, but you may not be able to get them until $500.75
  • You will usually pay slippage on both side of the transactions

5) Carrying Cost Of Leverage

  • Leverage is the credit extended to you from your brokerage house
  • Unless you’re already wealthy, you won’t be extended very much of it
  • If you are using leverage then you’ll have to pay the carrying cost or interest on this credit

6) Financial Advisors

  • Financial advisors are what are formerly known as stockbrokers
  • They are the frontline salesman for banks/brokerage houses and their job is to manage as much of your money as possible at the highest commission rates
  • They are paid commissions depending on the type of investment they sell you on
  • Many will try to convince you of their market timing and stock picking abilities which they don’t have, if they were consistently right they wouldn’t be advisors

7) You Lack Skill

  • The best investors of the 20th century, Warren Buffett and George Soros, have only averaged a 20% rate of return per year
  • To think you will do better over a 3o to 4o year period is not going to happen
  • Stock picking is gambling and you’re playing against the best in the world, you’ll most likely lose money on the whole

8) Bond Returns Are Usually Worthless

  • Bonds are a loan given to a government or corporation by an investor in exchange for repayment of the loan with interest
  • Government bonds are usually the safest investment vehicle, unfortunately the rate of return on these is so low it will rarely cover your inflation costs, you might as well put your money in a high interest savings account
  • Provincial or corporate bonds will offer slightly higher dividends but are at a higher risk of default, even still most of these will not be enough to cover inflation
  • Junk bonds, or high yield bonds are bonds that pay large dividends, these can offer substantial returns, unfortunately the default risk on these is usually far too high for making a smart investment in
  • With all that said, there are some good medium return bonds (6%) out there but they are few and far between

9) Lack Of Information

  • You as an outside investor will not have anywhere near the depth of information a top-level hedge fund manager does
  • Most of these guys are deep into corporate espionage and have access broker first calls as well as actual to legal and illegal inside information on public companies
  • These guys will get the news way before you do

10) Lack Of OPM

  • Lack of OPM, or Other People’s Money is by far the largest reason why the stock market won’t make you rich
  • Warren Buffett and George Soros made their billions from management fees of OPM reinvested in their funds
  • Large hedge fund managers are nothing more than service providers, they sell the service of superior returns to wealthy individuals looking to become wealthier
  • Without outside investors even the best managers would have made no more than a modest living from investing

What Should You Invest In Instead?

  • If you’re still set on investing your money, the stock market can offer you some decent returns
  • Combined with compound interest, reinvesting profits and doing so through some tax shelter you can make decent money
  • The S&P 500 has earned approximately 8% a year since its inception
  • You can invest in a passively managed index fund which will hold the basket of stocks for its particular benchmark eg. S&P 500
  • These types of funds come with very low MER, usually around 0.3% if  you buy them online
  • This is not an active trading strategy, this is a hold forever strategy
  • If you are prepared to do this you may have to suffer through down decades, this is not for the faint of heart