Q. I am invested in the stock market, but my thoughts are that the stock market is the biggest Ponzi scheme the world has ever seen. How can so many people make six figures and do little or nothing to earn this?
— Frustrated

A. When we watch the gyrations of the stock market, it can be scary, or exciting, or confusing.

When stocks fall and we lose money, it’s pretty easy to feel we’ve been played.

And while many criticize the system and feel that it’s a Ponzi scheme, well, it’s not.

The stock market is the best way for small investors to invest their money for the long haul and have it grow, said Stephen Craffen of Stonegate Wealth Management in Oakland.

“Unfortunately, the market does not always cooperate and perform the way we hope or expect it to,” Craffen said.

This underperformance can persist for long periods of time. From from 2001 through 2015, large company stocks in the S&P 500 returned only 5 percent per year, Craffen said.

“That mediocre return combined with possibly poor investment choices made by many individual investors may lead one to believe that it is a loser’s game that must be rigged,” he said.

On top of that, Craffen said, he’s seen several studies that show the average investor’s return may only approach 20 to 40 percent of the long-term average return of the market, which has exceeded 10.5 percent since the 1920s.

But there are reasons why the average small investor sometimes does so poorly.

“They try to time the market and they panic when the market suffers severe declines like in 2008,” Craffen said. “We’ve seen people sell at the bottom and then realize after the recovery was well on its way that they need to get back into it. If you got back into the market even six to eight weeks after the recovery started you permanently lost 15 to 20 percent of growth.”

Other investors make bad investment choices, choose high cost funds or poor managers, Craffen said.

Many investors gravitate towards the fund that is on the front of financial magazines just because the fund may have happened to get somewhat lucky and have a great three to five year run, he said.

“Studies show that few active managers in very efficient asset classes like large company stocks consistently repeat that over performance,” he said. “If you are not going to spend time researching the best choices, just use a low cost index fund.”

Craffen said others invest money that they will need in two or three years, but the stock market is a long term investment. If you have funds that you need in less than three to five years, consider bonds instead, he said.

Craffen offered these guidelines to help turn the loser’s game into a winning one:

• Stick to lower cost index funds if you are not prepared to closely monitor your portfolio.

• Never try to time the market unless you are very sophisticated (and even then he recommends against it).

• Be very diversified by asset class so prolonged periods of underperformance by one asset class has less of an impact on your portfolio. Craffen suggests — as a start: large company stocks, large company international, small and mid-size domestic, real estate mutual funds, domestic and international bond funds, convertible bond funds, and possibly some “alternative” mutual funds that use strategies like long/short or market neutral.

• Blend those asset classes to match your risk tolerance and or time horizon — the period over which the money can be invested. If you have a low risk tolerance and a short time horizon, invest 60 to 80 percent in the bond categories and the rest in a blend of the growth (stock) categories. If you have a high risk tolerance and a long time horizon, reverse those ratios.

• Be aware that the greater the risk of an asset class, the longer you need to be invested in it to increase the odds that you will make money in it.

If you are not that knowledgeable or do not want to spend time on this, Craffen recommends you consider hiring a professional advisor, and in particular, one that does not earn commission. Those are known as fee-only advisors.

On those high salaries?

Some people earn them, and some don’t, Craffen said.

Andrew Wang, senior vice president of Runnymede Capital Management in Mendham, said investors have been through a lot in the past 17 years, including what he calls the demise of long-term capital management nearly bringing down the global financial markets, the boom and bust of the Internet bubble, and the 2008 financial crisis.

“Adding insult to injury, mom and pop investors saw their tax dollars used to bailout Wall Street investment banks for their poor investments in subprime mortgage loan derivatives,” Wang said. “People feel like the system is rigged. Should investors be angry? Sure. I know that I am too. Just don’t let your mistrust derail your financial future.”

Wang challenges you to get back to basics.

He said in his career, he’s spoken with many great investors and they all had one thing in common.

“They invested in great businesses that grew for 30 or 40 years, and beyond,” Wang said. “Warren Buffett says, `Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.’”

Wang said for his clients, he strives to own the highest quality companies defined by clean balance sheets, experienced management teams and excellent growth prospects.

“In fact, we even coined a term: kerchunker companies,” Wang said. “Ker-chunk, ker-chunk, ker-chunk, quarter after quarter, year after year, these companies grow their earnings.”

He said you should do your best to ignore the noise: high frequency trading, quarterly earnings, zero percent interest rates.

“Rather than seeking out the home run, it’s better to own a portfolio of companies where you’re content with singles and doubles,” he said. “If you don’t like the way the game is being played, make sure that you play the game your way. That means having a process and sticking with it.”

Want said he believes that by focusing on companies that can deliver consistent earnings growth, over time the stock price should follow, giving you a great chance of being a successful investor in the long-term.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.