I wish I knew. This question is one of the great mysteries in the world – even Moses asked God this question and was not answered in a direct manner according to our Sages.
However, here is an approach to this difficult subject that I heard from my teachers. Judaism is a religion that sees this world as a means to enter into the World-to-Come. This fundamental belief of our existence in this world gives us a purpose in life – to build on our inherent spirituality and to try and draw closer to God in order to enhance God's presence in this world. In fact, Jewish Tradition teaches that physical death is merely a means of gaining entry into the World-to-Come.
How is one to receive a place in the World-to-Come? By performing mitzvot and keeping God's Torah. In the World-to-Come perfect justice will be clear to all and the righteous will be rewarded appropriately and the wicked will be punished appropriately.
There is a Midrash that amplifies our inability to fathom the ways of God. "If I have found favor in Your eyes, My God, show me Your ways" In this verse, according to the Midrash, Moses asked God to explain Divine justice to him. The Midrash relates that, in response, God said that He would show Moses two incidents of Divine justice. In the first scene shown to Moses, a soldier dismounts from his horse to have a drink at a small pond. As he gets back on his horse he drops a bag of money without realizing it. The soldier rides off and a teenage boy walking by, sees the money pouch, picks it up and walks away. Later an old man lies down by the pond to sleep. The soldier, who has now realized that he has lost his money, returns to the pond and sees the old man there. He asks the man where his money is and the old man claims not to know. The soldier then draws his sword and kills the man in anger. God said to Moses, "See! Perfect justice!" Obviously Moses did not understand, so God showed him yet another incident.
In the second scene a young boy and his father are walking along a path in a forest. Suddenly a bandit attacks them, knocking the father unconscious and taking his money. A young military cadet observes the scene from behind some bushes where he had been resting, but he does not do anything until he sees the outcome of the attack. As the bandit is about to escape, the cadet jumps out with his sword, scaring the bandit, who drops the money and runs away. The cadet picks up the money and rides away, leaving the boy crying with his unconscious father lying nearby. Again God said to Moses, "See! Perfect justice!" And again Moses did not understand.
God then told Moses that the second scene that he was shown occurred before the first. The bandit of the second story is the old man in the first, who is killed by the soldier. The cadet who took the boy's money in the second story and did not intervene to prevent the robbery, is the soldier who loses the money and kills the bandit [now an old man] in the first story. The teenager who finds the money in the first story is the child of the second story.
