A friend asked, when investing in stock funds, if everyone ends up making money, then who is losing money?

Investing in stock funds does not necessarily mean that profits come from the losses of another investor. If investments are made wisely, it is possible for all investors to make money in the long term.

This is because investing in stock funds is not a "zero-sum game."

Zero-sum gameWhat is a zero-sum game?

For instance, consider a game of rock-paper-scissors between two people.

Each person puts in 100 yuan, and the winner takes all in a single round. If both players choose the same, they continue to play until one party wins.

In this scenario, the winner takes home the 200 yuan, earning a profit of 100 yuan.

The loser, on the other hand, incurs a loss of 100 yuan.

This is a zero-sum game: one party's gain is necessarily balanced by the other party's loss.All participants in the game, the sum of their gains and losses, equals zero.

Gambling is a typical zero-sum game.

For all participants in gambling, the sum of gains and losses equals zero.

Considering that casinos usually take a cut from this, it can even be a negative-sum game.

Advertisement

In zero-sum games, inexperienced ordinary people, if they go up against experts, naturally lose more than they win, and are only there to be harvested.

Such games often appear in varieties that do not have cash flow. For example, gambling, virtual currencies, and other items that can be speculated on.Investing is a Positive-Sum Game

However, when we invest in stock funds, we are engaged in a positive-sum game. The sum of the profits of all participants can be positive.

This is because investing in stock funds essentially means investing in the underlying listed companies, which are capable of generating profitable cash flows.

The long-term profit growth rate of A-share listed companies is around 10% annually.

Overall, all participants can enjoy this annualized rate of return.

(1) The average return of all stocks can be observed through the CSI All-Share Index.The index started at 1,000 points at the end of 2004 and closed at 4,816 points on June 28, 2023.

The index does not take into account dividend income by default. If the annual dividends are added back, the points would be 6,167.

That is to say, all A-shares have roughly increased by more than six times since 2004.

Investing in A-shares through some stock funds can yield better returns than the CSI All-Share Index.There is a stock fund total index in the A-share market (Index Code: H11021), which includes all stock funds of A-shares.

This index has risen from 1,164 points at the end of 2004 to 9,599 points as of June 28, 2023.

Looking at the long term, the overall annualized return of stock funds is slightly higher than that of the China Securities Index (CSI) 300.

As of June 2023, the market is still at the bottom of a bear market, with stock asset returns below historical average returns.

If it reaches a rating of three stars or above, the returns could be more substantial.In other words, if we do not take into account investment fees and taxes, the sum of the returns of all stock fund investors would be equivalent to the return of the total stock fund index.

After deducting the corresponding costs, the returns of all stock fund investors can still exceed the average returns of the stock market.

Therefore, investing in stock funds does not require anyone to lose money; it is possible for all participants to make a profit.

We just need to buy when the valuations are low, avoiding purchasing at too high a price, and all parties involved can profit.

However, in the actual investment process, the experience of many investors is often not like this.Some time ago, a fund company conducted a report titled "2022 Public Fund Investor Profit Insight Report," which included corresponding data:

From July 1, 2019, to June 30, 2022, over a three-year period.

The average return of fund investors lagged behind the returns of the funds themselves by approximately 15.76%.

The returns of the majority of fund investors were significantly lower than the average returns of equity funds.

Why is this the case?

Mainly because many people often chase rising prices and sell off when the market falls, engaging in frequent trading.(1) Most investors buy stock funds, often after a bull market has surged significantly.

For instance, at the beginning of 2021, there were numerous new funds with a scale of tens of billions, rated as 3-star at the time. In 2022, the situation was reversed, with new funds averaging only a few hundred million in scale, and many existing funds experiencing redemptions of 30-50%.

Buying high and selling low can result in substantial losses in returns.

The correct approach should be the opposite.

(2) Another reason is frequent trading.Previously, a fund company conducted research showing that the average holding period for individual investors in stock funds is only about three months.

This duration is not sufficient to wait for stable profits from stock funds.

Moreover, frequent trading also leads to more transaction fees, which erode the returns.

In summary,

To achieve good returns, one must overcome the two points mentioned above.

Buy when undervalued and hold patiently.However, while these concepts may sound simple, implementing them in practice is quite challenging.

For instance, in the context of a 5-star investment, actively selecting advisory portfolio combinations or index-enhanced advisory portfolio combinations, the actual goal is to purchase at a lower cost.

At the same time, Screw will also write some investment articles and content to help everyone get through the bear market bottom phase and persist until the next bull market arrives.

Good quality + good price + long-term holding = good returns.