If the market increases by 6-8% annually, how can someone in the future afford to buy even one stock if their income does not increase proportionally? Won’t stock prices increase 6-8% indefinitely prohibiting anyone from buying them? Also if the market crashes to correct the increases, how can anyone make a profit off long term investments without timing the market? I would like to invest in broad index funds but don’t quite understand how my money will increase if there is always the risk of a correction crash before I retire and take my money out of index funds. Thank you.
In: Economics
The sticker price of a stock is almost completely irrelevant to retail investors(aka normal people). Most investment is through mutual funds where the price per share of the underlying assets doesn’t affect the cost to invest. Add to that the ease and cost of investing for retail investors has dropped considerably in the last 100 years and the problem you are thinking exists has never manifested itself.
You can make money without timing the market exactly because the value increases with time. Over long periods of time this has never not been true and wont be in the future.
You buy a smaller number of shares and while the average goes up many go down rather than up and there are new companies being created all the time.
Most companies split their stock when it gets too expensive per share… for example, when Apple hit something like $600/sh a few years back, they split 7:1, so you had 7x the shares at 1/7 the previous price. It has since increased from like $85 to $310.
Berkshire Hathaway (Warren Buffet’s company) is the primary exception, with their shares trading at $334,500/sh right now.
A lot of the growth in stocks is ACTUAL growth. Firms are producing real value through the application of labor and capital in the same way that you would produce real value if you chopped down some trees and used them to build a cabin. Suppose this true growth is 6% per year. There might be times when the market grows at 8% per year for reasons unrelated to true growth (e.g. bubbles), and that excess growth may be wiped out by a “correction” (such an annoying euphemism). That correction could even temporarily wipe out some of the true growth. But over the very long run, the market will even out and your investment will grow.
Well it doesn’t always increase annually. From 2000-2011 you would have lost money counting inflation.
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