Why does the market always go up?

Facebook nrtO00
Apr 10, 2018 17 Comments

The general consensus seems to be to invest in low cost index funds. However, that strategy seems to assume that over a long time horizon, the market will always go up.

Given that most retirement plans make this assumption (market on average appreciates 8% yearly, draw 4% yearly for retirement), how will society adjust if market growth stops?

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TOP 17 Comments
  • Lyft shodan
    Inflation. It's caused by expansion of the money supply and makes prices go up.
    And it's not growth. growth is the rate by which economic activity beats inflation.
    Apr 10, 2018 5
    • Facebook nrtO00
      OP
      What prevents inflation beating economic activity?
      Apr 10, 2018
    • Lyft shodan
      Nothing. you can have negative growth.
      Apr 10, 2018
    • Facebook nrtO00
      OP
      How can you reconcile this with your original answer that inflation causes the market to always go up over a long time horizon?
      Apr 10, 2018
    • Amazon ShAV42
      The crux of it is all the data we look at for stock market performance is for the US during its best 100 Years or so in terms of economic growth / military power. If you followed the same strategy in Japan or Argentina, you will not see such rosy results. Essentially what you’re betting on is in the time period before your retirement (maybe in the next 40 years or so), the US is going to maintain the status quo. It’s not an unreasonable bet, so I personally do follow the low cost index fund strategy but it is in no way a guaranteed winning strategy.

      Ofcourse there are index funds that diversify towards international markets as well, so you may want to invest in such a fund if you believe the above is not such a good bet.
      Apr 10, 2018
    • Lyft shodan
      I'm using "growth" interchangeably.
      "Real" growth is growth minus inflation. that can be negative.
      Nominal growth has always been positive but it can theoretically be negative.
      Apr 10, 2018
  • Google Tesla69
    The market doesn’t always go up. See Japan for the past 30 years.

    The people who tell you to put 100% in equity index funds are stuck in groupthink.

    In real terms (taking out inflation) and taking out the equity risk premium, markets only go up if economic growth is larger than currently priced-in *expectations*
    Apr 10, 2018 0
  • This comment was deleted by original commenter.

    • Google Tesla69
      Stupid. Wealth is not zero-sum.
      Apr 10, 2018
    • Google Tesla69
      Well it’s not zero-sum which was an assumption in your answer.

      Just because one sentence refutes your argument isn’t my problem.
      Apr 10, 2018
  • Oath / Eng 20XL
    The market always goes up because economy is not a zero sum game. Producing value in one industry can improve productivity in another industry and therefore produces even more value.
    Apr 10, 2018 1
    • Google Tesla69
      Faulty reasoning. Todays market price reflects future economic growth expectations.

      If the current price is based on 4% economic growth and the economy only grows 3%, the market will fall despite the economy growing a lot.
      Apr 10, 2018
  • Amazon gTx3el
    Thought experiment:

    Equate your wealth with any physical asset. Like gold, or real estate. Calculate the weight or square miles of you wealth: "I'm worth ten pounds of gold" or "I'm worth one square mile".

    Put these assets in a perpetual trust and let it grow by 4% per year, to be inherited by you descendants.

    Now suppose this trust lasts for
    two thousand years. Now how much land area or gold weight is it worth? 1.04^2000 = ?

    And how does that compare to the total mass of the solar system, or the surface area of all its planets?

    Do you still think 4% growth if achievable in perpetuity?
    Apr 10, 2018 4
    • Google Tesla69
      Jesus this thread is filled with misunderstandings. I should write a book.

      As we speak, the proportion of all wealth is being shifted into virtual assets. Even if total wealth grows, it says nothing about physical wealth.
      Apr 10, 2018
    • Google Tesla69
      And yes, we can consume the resources of the observable universe.
      Apr 10, 2018
    • Amazon gTx3el
      I would argue that "virtual assets" are at least partly a form of inflation. Ultimately you live in a physical home consume a physical burger.
      Apr 10, 2018
    • Microsoft / Eng 20% raise
      Depends what unit that is denominated in. You won't make as (numerically) high returns on Euros as you would with Ukrainian Hryvnia.

      Also there's a difference between 4% growth forever and 4% returns. You're assuming none of the returns are spent, and rather they are entirely reinvested.
      Apr 10, 2018
  • LinkedIn / Eng FqzB62
    The money supply of the world will only go up. Central banks print money all the time. Also, as the world becomes more populated, in theory, more value will be produced and that will have a positive correlation with the markets.

    If you invest internationally, if anything happens to Europe, US stocks will go up; if anything happens to US stocks, gold will go up. Money will always be moved around and as Jim Cramer says "there's always a bull market somewhere."
    Apr 15, 2018 0