- Average annual rate of USA's inflation is ~2% for the past couple of years
- Average annual return of S&P 500 is 10%
Many people suggest to move your money of your bank, which is maybe paying 1.5% APY, and into index funds so that your money is not depreciating. I agree with this advice because the math is simple: 1.5% < 2% < 10%. But I'd feel more comfortable if I knew why I was following the advice. Why does S&P 500 grow faster than inflation?
To play devil's advocate, I'm throwing out two counter examples below to the 10% growth. By no means am I a skilled economist, so I will not be offended if you correct me.
Spread of Wealth
I think the companies in the S&P 500 grow by selling more products. When their profits grow, investors have more faith in the company and buy their stock. Buying stock bumps up their NAV. But why would consumers only buy from these 500 USA companies? Aren't they also buying from the thousands of other companies in the world?
Google and Apple are both in the S&P 500. Let's say someone buys an iPhone from Apple. They would be unlikely to buy an Android phone and thus Google's operating system is unused. This is just one example of competition. Many other pairs of competitors exist in the S&P 500. The bottom line is when one company succeeds, their competitor may fail. So the net success of the two companies should remain neutral. The net will not grow 10% a year.