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It is often said that the market is expected to go up in the long-term, even if it may be shaky in the short-term. The argument offered for this proposition is a simple visual picture of the S&P500 index.

See returns here

I have two counter-arguments.

  1. Firstly, it seems much of this argument hinges on the abnormal growth of the past 10 years. Take a look at the same picture above, and cut off everything that happens after 2008. An investor looking at this chart in 2009 would see a massive growth since the 50s, but would they still be so confident that the market still has growth potential in it? Might they not instead think that the best is over, that they missed the "real" growth of the 20th century, and that it's all a bumpy Keynesian ride from here on out? Of course, that didn't turn out to be the case, but the point still stands: the "picture argument" collapses if one ignores just 10 years of data, which suggests it isn't as robust as it may seem.
  2. Let's assume that the market has always grown, with no bumpy rides at all, since forever. Why should that mean it will always grow? That is akin to taking a step towards a cliff, and not falling over, so you tell yourself "I haven't fallen over yet, so that means I can keep walking towards the cliff and never fall off!". Well, no, at some point you'll reach the edge and then fall. How do we know it isn't the same with the stock market? The market grows, until it doesn't. We're not throwing dice here, the market is not random, it grows based on reality, and that reality may change at any given moment. Indeed, thinking about it in this way, the argument that the market "always grows" may end up defeating itself! Because if people end up believing that the market always grows, that will lead to people investing more of their money in the market, which will inflate the value of the market above and beyond its "actual" worth. At some point, that house of cards will come crashing down. Has it happened yet? No. But what reason is there to suppose that the cliff isn't out there?

My question is, what are the responses to these counter-arguments? What reason is there to expect that the stock market will continue to generate returns in the future, beyond the (unsatisfying) appeal to past performance?

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    Please provide source that says it is guaranteed to go up long term. More commonly, it is said: "past results are not an indication of future performance". – Pete B. Mar 15 at 16:51
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    On this graph, the S&P roughly triples in value from '80-'90, triples again from '90-'00, and triples one more time from '10-'20. The last 10 years don't seem particularly anomalous from a historical perspective - rather, it's the pair of recessions in '00-'10 that's the outlier. – Nuclear Hoagie Mar 15 at 18:01
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    A logarithmic scale on the y axis would be much more appropriate. – Ben Crowell Mar 16 at 0:31
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    I agree this question probably could have been edited as the subject matter certainly isn't offtopic. To the person asking the question, just ask your question, don't construct an inane strawman then "refute" it and request that others pick apart your refutation as though your strawman argument isn't the problem at hand. A lot of people would, and did in their answers to this question, take issue with the assertions you present in the first two sentences about what the market is guaranteed or expected to do. To some extent this question is about the simple nature of market indexes. – quid Mar 16 at 19:41
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    The question, as originally posed, felt like an invitation for an argument, not a PF question. As a group, we've discussed 'saving' borderline question via edit, and with respect to @Nobody 's effort to do just that, I've cast the reopen vote, as I just saw this. An existing vote timed out. – JTP - Apologise to Monica Mar 24 at 10:38
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Is it a myth that the stock market is guaranteed to go up long-term?

No, it is not a myth; it is a generalization. As you say, this is not intended to be taken literally, and nothing is guaranteed.

If the argument is "the market always goes up long-term", then "in this particular short-term window it didn't go up" isn't really a valid counter-argument. You're selecting a subset of data that looks like it disproves the market going up, and deliberately ignoring that it is immediately followed by short- and medium-term growth. Even if you end the graph at that 2008/2009 local minimum, that's only a local/short-term minimum. Once you consider long-term (start any time on that graph before approximately 1998), it has still gone up. Consider also that the graph you are showing only goes back about 30 years. If you look at the Dow instead of S&P (see The Market Always Goes Up for a graph, as well as one person's opinion on the market always going up), the upward trend over the long term is much clearer.

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  • You compleley miscrompehended my argument. I am not making an argument based on cherry-picking historical data. That's what YOU are doing, since you are assuming that the future is predicted by the past, hence you are making an argument of the entire future timeline of humanity based on cherry-picked data corresponding to a tiny period of 100 or so years. And 100 years divided by infinity = 0, so that's some cherry-picking if I ever saw it. – fewegw Mar 15 at 18:25
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    @intuitive With that logic, the assertion you made about commodities and real estate in your question is equally flawed. – Ben Miller - Remember Monica Mar 15 at 20:35
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    @intuitive What exactly are you referring to with "you are assuming that the future is predicted by the past"? I don't see the future mentioned at all in this answer. – glibdud Mar 15 at 23:05
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You are right - nothing is "guaranteed". But if you look at every 10-year period of the S&P 500, there are only three 10-year periods since 1935 that had negative returns: 1929-1938 (recovery from the Great Depression), 1999-2008 and 2000-2009 (which included two crashes). Every other 10 year period (including periods that only had one crash like 2008) has shown positive returns overall. And there has never been a 30-year period that did not have at least an 8% average return overall, let alone lost value.

So yes, the market is not "guaranteed" to grow over time, but history has shown us that it almost always has.

My counter-arguments are:

  1. You have a problem of scale by just looking at the last 10 years as the only source of growth. The fact that you're starting with a low number (compared to the ending price) makes it look like the market was stagnant from 1980 to 2010 (taking off in the last 10 years as you suggest), when in reality it grew by 11% a year on average, or a total growth of 2,700%! So $100 invested in 1980 (and left alone) would be worth $2,700 in 2010. That $2,700 would be worth somewhere around $8,000 today.

Also, if you looked at a chart of the period from 1940 to 1980, you'd see similar exponential growth with a few dips that recovered after a few years.

  1. You're assuming that there IS a cliff to fall off of, and that the current market value is completely fictitious. One reason that the market grows is because the economy grows overall. Businesses grow, new business are created, and at a rate larger than the rate of failures. Yes the market may be overpriced to some extent, but to call it a "house of cards" that will tumble back to 1980 levels (or even 2000 levels) seems completely overblown.

Commodities but especially real estate are much more stable long-term investments than the market, because their worth is always tied to an actual, tangible product of value,

But equities are based on something tangible - the value of the companies that they represent. It's not some vacuous concept that has no bearing in reality. Commodities are generally more risky than equities - look at the charts of gold prices compared to the S&P and see if you'd have been better off investing in gold in 1980. Oil is back to the same price level it was at 20 years ago and is highly volatile. And yes, real estate also tends to grow, but is much less liquid and also subject to crashes (look at real estate prices in CA and FL in 2008).

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  • Good response to #2. I opted to skip discussing it because all I could come up with was "this is absurd" and multiple paragraph responses I do not feel like writing out – yoozer8 Mar 15 at 17:08
  • Poor answer, since it ignores the KEY point of my argument, which is that the "best is over", and the market is no longer growing due to actual value being created, as it was for most of the 20th century. There is a limit to human consumption and human growth, and we're getting close to it, and that limit may even be dropping down towards us due to climate change considerations. The argument that the economy grew xyz procent since 1930 is nonsensical, because .... we are not in 1930. Growth may have been exponential in the past, but in the future, it won't even be linear. – fewegw Mar 15 at 18:24
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    @intuitive What are you basing that belief on? What is different about today than even two years ago that makes you think it's "downhill from here"? If you believe that, that's fine - don't invest in stocks. But you can't prove that something's going to happen by dismissing what has happened. – D Stanley Mar 15 at 18:37
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    I can't predict the future any more than you can, which is why I agree that it's not "guaranteed" to go up. But your argument seems to have flipped from "it's not guaranteed to go up" to " it's guaranteed to go down". Which is an even worse position without some significant evidence (not feelings). – D Stanley Mar 15 at 18:41
  • Why the S&P 500 in particular? Why not the Nikkei 225? – user253751 Mar 16 at 9:46
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Look at the Nikkei 225 Nikkei 225 Source: Wikipedia

Investing in Japanese stocks is not the bumpy but sure way upwards it used to be in the US and most other markets around the world.
However, this is not an argument against investing in the stock market in general. This is more an argument for diversifying your portfolio over more than one market, even if it happens to be the largest and most important market at the moment. Japan has been the only major market with this issue since WW2.

Investing in stocks long term and strongly diversified is investing in capitalism. So far, capitalism has been a pretty big success story and economies world-wide have been adding value. In this light consider other investments. What are commodities worth if economies worldwide come to a halt? What is real estate worth if peoples wealth is decreasing? What is real estate worth if population in certain areas are decreasing? There is no sure way to invest your money and get a return that can beat inflation.

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Your headline says "generate returns" which is not the same as stock price going up.

Fundamentally, stock is ownership in a business that is (hopefully) generating a profit. That profit has to go somewhere, and there are pretty much two places: Dividends and growing the business to generate even more profits down the line.

The profits from the business are the 'returns' you seek. As long as businesses are generating profits, the stock market will generate returns.

If the business pays dividends, then clearly that is a return to the investor, easy to see and measure. If the business re-invests in growth, then this may not directly show a return, since the stock may not go up in value. But assuming that the profits really do grow, then at some point the stock will have to go up or produce a dividend.

So no - stocks DO NOT have to go up over time, but if they don't it's because the market as a whole is losing productivity, and that will be a VERY BAD thing.

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  • The initial version of the title mentioned stocks going up, and did not use the words "generate returns"; that was later edited. – yoozer8 Mar 26 at 20:12
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That the stock market is “guaranteed” to do anything is demonstrably ridiculous.

First of all, if humanity went extinct, clearly the market would not bounce back because the market would no longer exist.

Secondly, if by “guarantee” you mean “provided human beings exist and provide value in a market” then the next question is: how long is eventually?

It’s a ridiculous statement because as soon as you start moving the goal posts to accommodate for it you realize that what you’re essentially saying is that “given an infinite amount of time, the value of the market will increase positively by any number”, which is true, but at that point chimpanzees would also have written Shakespeare.

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It is often said that the market is guaranteed to go up in the long-term, even if it may be shaky in the short-term.

The argument offered for this proposition is a simple visual picture of the S&P500 index.

Although the stock market going up with certainty (sans a large-scale thermonuclear war) is a fact, the argument is flawed.

Historical return is not guaranteed future return.

The reason for the argument is as follows:

  • It has been forecasted that world economic growth continues. A part of this growth goes to increasing corporate profits. The proportion of corporate profits as a fraction of GDP cannot be over 100%, so in the very long term, let's say 500 years, it is guaranteed that corporate profits cannot grow more than world economic growth. In the other direction the same argument doesn't work (for example if the entire world falls to communism, corporate profits could fall to 0% of GDP, so we have to just believe based on historical evidence that communism won't be successful).

  • Central banks in developed countries have a target of 2% inflation for the long term.

These two components are the ONLY source of stock market going up. As a matter of fact, the stock market is guaranteed in the very long term to return these two components and additionally a third component that takes into account dividends (and dividend equivalents such as share buybacks or "negative share buybacks", i.e. offering new shares that dilutes existing ownership).

In fact, we can estimate the returns of a stock investment today with these components.

Historically, world GDP has increased at perhaps about 2.5% but due to finite resources, in the long term growth in the future is more likely to be around 2%.

If central banks succeed in the 2% inflation target, inflation in the long term will be 2%.

Dividend yield is usually around 3% in the developed markets. There could be markets where it is lower and markets where it is higher, but for a well-diversified investment, 3% dividend yield is the approximate current level. (When calculating dividends, one needs to separate sustainable dividends from dividends that are the result of cyclically high corporate profits as those aren't sustainable.)

So, if you make a well-diversified investment, your return is going to be 2% + 2% + 3% = 7%, before costs and taxes. Someone who trades stocks a lot will see both high costs and high taxes. On the other hand, it may be possible to defer paying taxes for a long time by not making any adjustments in the existing portfolio but rather rebalancing by directing the new investments where they need to be directed.

S&P 500 is a price index. Thus, it does not include dividends. So we can estimate S&P 500 increases at about 2% + 2% = 4% per year, not 7% because there are no dividends in the index. (Of course an individual investor investing in S&P 500 index will see dividends too even if the index value doesn't take into account dividends).

Now, if you invest today 100 USD to S&P 500, will you have 107 USD one year from now? Well, you won't have for two reasons. Firstly, the US stock market (S&P 500) is one of those markets where dividend yield is somewhat lower (about 2%) so 106 USD would perhaps be a better mid-estimate. (To gain the average 3% dividend yield, you need international diversification). Secondly, stock markets fluctuate a lot in the short term, so it is more likely your investment is somewhere in the interval [20 USD, 200 USD]. But where, we don't know.

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