Thoughtful Question!! Why, over the long run, does the “REAL” stock market value always increase?
There is always inflation, and the market is priced in dollars, so the market will always become more valuable as the value of the dollar decreases, kind of like land prices. Plus, you don’t have to have growth, but most companies should make profit. Profit equals more money than you had before, so you’re worth more. If you make 5 bucks a year, every year, you’re growing and becoming worth more.
Perhaps 2 main issues come to play in this. 1. Value. If people see value then they’ll invest and prices will go up. If they don’t see value they won’t invest and prices will start to come down. 2. Superannuation (401K in the US). People are sitting on massive super funds and with so many stock funds and managed funds out there that have to be in the market and weighted according to the index, it creates more and more buying. Lastly something to consider, which has been talked about extensively before, is when the baby boom population starts withdrawing funds from the market to live off in retirement we’ll probably see a very large correction take place.
Some good answers here, but I’ll try to give you another angle. The “REAL” stock market doesn’t exist as we knew it only a few years ago, let alone a century ago. Of the original Dow 30 stocks, only one company still exists. The companies of the Dow changes almost every year. What happened to Woolworths? It went out of business and was dropped from the Dow. So if the dogs get dropped off, and new winners keep getting added, like Microsoft, it is only an “appearance” of a rising Dow. I would guess that the total loss of the dropped companies outweigh the meager gains of the remainder, or it would be pretty darn close to even.
