Will the stock market continue to grow forever?
"The stock market may not grow ""forever"". There will be growth in the stock market, though. The stock market is a positive-sum game, since it is driven in large part by the profits earned by the companies. This doesn't mean that any individual stock will go up forever, it doesn't mean that any given index will go up forever, and it doesn't mean there won't be periods when the market as a whole drops. But it is reasonable to expect that long-term investing in the market as a whole will continue to return profits that reflect the success of companies invested in. Historically, that return has averaged about 8%; future results may be different and exact results will depend on exactly when and how you invest. Re ""what about Japan, which has been flat over 30 years"": Market being flat doesn't mean individual companies may not be growing strongly. Picking stocks may become more important, and we might need to relearn to focus on dividends rather than being so monomaniacal about growth (dividends are not reflected in the indices, please note), but there will be money to be made. How much, and how much effort is required to get it, and whether the market offers the best available bets, deponent sayeth not. Past results are no guarantee of future returns, and your results may be better or worse than average. You should be diversified into bonds and such anyway, rather than only in the stock market." "The answer to your question depends on what you mean when you say ""growth"".  If you mean a literal increase in the aggregate market capitalization of companies, across the entire market, then, no, this sort of growth is not possible without concomitant economic growth.  The reason why is that the market capitalization of each company is proportional to its gross revenue, and the sum of all revenue from selling ""final goods"" (i.e., things purchased and used by consumers) is, apart from a few technicalities, the definition of GDP.  The exact multiplier might fluctuate up or down depending on investors' expectations about how sales will grow or decline going forward, but in a zero-growth economy this multiplier should be stable over the long run.  It might, however, still fluctuate over the short term, but more about that in a minute.   Note that all of this applies to aggregate growth across all firms.  Individual firms can still grow, of course, but as they must do this by gaining market share from other companies such growth would be balanced by a decline for some other firm.  Also, I've assumed zero net exports (that's one of the ""technicalities"" I mentioned above) because obviously you could have export-driven growth even if the domestic economy were stationary. However, often when people talk about ""growth"" in the market, what they really mean is ""return"".  That is, how much does your investment earn for you.  This isn't really the same thing as growth, but people often think of it that way, particularly in the saving phase of their investing career, when they are reinvesting their returns, and therefore their account balances are growing.  It is possible to have a positive return, averaged across the market, even in a stationary economy.  The reason why is that there are really only two things a firm can do with its net profits.  One possibility is that it could invest it in growing the business.  However, there is not much point in doing that in a stationary economy because by assumption no increase in aggregate consumption (and therefore, in the long run, aggregate production) are possible.  Therefore, firms are left with only the second option, which is to pay them out to investors as dividends.  Those dividends provide a return that is independent of economic growth. Would the stock market still be a good investment in such an economy?  Yes.  Well, sort of.  The rate of return from firms' dividend payouts will depend on investors' demand (in aggregate) for returns on their investments.  Stock prices will rise or fall, causing returns to respectively fall or rise, to find that level.  If your personal desire for returns is lower than the average across the investing public, then the stock market would look like a good investment.  If your desired return is higher than the average, then it will look like a poor investment.  The marginal investor will, of course be indifferent.  The practical upshot of this is that the people who invest in the stock market in this scenario will be precisely the ones for whom the stock market is a good investment, given their personal propensity to save and desire for returns, and so forth. Finally, you mentioned that in your scenario the GDP stagnation is due to declining population.  I am less certain what this means for investment, but my first thought is that you would have a large retired population selling its investments to fund late-life consumption, and you would have a comparatively small (relative to history) working population buying those assets.  This would lead to low asset prices, and therefore high rates of return.  However, that's assuming that retirees need to sell assets to fund their retirement consumption.  If the absolute returns on retirees' assets are large enough to fund their retirement consumption then you would wind up with relatively few sellers, resulting in high prices and therefore relatively low rates of return.  It's not obvious to me which effect would dominate, and so it's hard to say whether or not the resulting returns would look attractive to the working-age population." Yes! Look at any graph or chart covering the last 100 years.  The graph goes up. It will continue to grow unless there is an extinction event and the population gets reduced.  Corporations will continue to grow to meet the needs of the ever expanding population.
For the constant growth problem, I don't see why the answer would be anything other than the stock price grown for 3 years at the cost of equity determined from CAPM. Someone can correct me if the dividend is relevant.  So:  rs = rf + beta x (market premium)  rs = 0.046 + 0.9 x (0.06) = 0.10  price now = $40.00  price after 3 years' growth = $40.00 x (1+0.10)^3 = $53.24  EDIT: https://www.quora.com/Why-are-dividend-yields-factored-into-beta  two conflicting answers so you'll just have to figure it out History...  No company has maintained such a high market cap over an extended amount of time.   Not only that, but is Apple worth a trillion dollars?  In a generation will their products be as popular?  They're worth significantly more than Exxon Mobil at this point...  If Apple's market cap does go to a trillion dollars its an upside of 60 percent or so.  Or I can invest in a company like Lenovo whose market cap is 11 billion and is expanding like crazy.  If their valuation goes up even to the 50 billion mark, that's an upside of nearly 400 percent.  Plus there's the whole supply/demand dynamic for a stock that is already widely owned, how much more money can new investors put into it?  When will all the funds who hold massive quantities sell?  Etc...  There are many reasons why no company has maintained a trillion dollar valuation....    Honestly it shocks me that people who frequent a finance message board don't understand these things. "On a longer time scale, the plot thickens:  It almost looks random.  A large drop in real rates in the mid-70s, a massive spike in the early 80s, followed by a slow multi-decade decline. The chaos doesn't seem to be due to interest rates.  They steadily climbed and steadily fell:  All that's left is inflation:  First, real rates should be expected to pay a moderate rate, so nominal rates will usually be higher than inflation. However, interest rates are very stable over long time periods while inflation is not.  Economists call this type of phenomenon ""sticky pricing"", where the price, interest rates in this case, do not change much despite the realities surrounding them. But the story is a little more complicated. In the early 1970s, Nixon had an election to win and tried to lessen the impacts of recession by increasing gov't spending, not raising taxes, and financing through the central bank, causing inflation.  The strategy failed, but he was reelected anyways.   This set the precedent for the hyperinflation of the 1970s that ended abruptly by Reagan at the beginning of his first term in the early 1980s.  Again, interest rates remained sticky, so real rates spiked. Now, the world is not growing, almost stagnating.  Demand for equity is somewhat above average, but because corporate income is decelerating, and the developed world's population is aging, demand for investment income is skyrocketing.   As demand rises, so does the price, which for an investor is a form of inverse of the interest rate. Future demand is probably best answered by forecasters, and the monetarist over and undertones still dominating the Federal Reserve show that they have finally learned after 100 years that inflation is best kept ""low and stable"":  But what happens if growth in the US suddenly spikes, inflation rises, and the Federal Reserve must sell all of the long term assets it has bet so heavily on quickly while interest rates rise?  Inflation may not be intended, but it is not impossible." "The June 2014 issue of Barclays Wealth's Compass magazine had a very nice succinct article on this topic: ""Value investing – does a rules-based approach work?"".  It examines the performance of value and growth styles of investment in the MSCI World and S&P500 arenas for a few decades back, and reveals a surprisingly complicated picture, depending on sector, region and time-period. Their summary is basically: A closer look however shows that the overall success of value   strategies derives mainly from the 1970s and 1980s. ... in the US, value has underperformed growth for over 25 years   since peaking in July 1988. Globally, value experienced a 30% setback   in the late 1990s so that there are now periods with a length of   nearly 13 years over which growth has outperformed. So the answer to ""does it beat the market?"" is  ""it depends..."". Update in response to comment below: the question of risk adjusted returns is interesting.  To quote another couple of fragments from the piece: Since December 1974, [MSCI world] value has outperformed growth by   2.6% annually, with lower risk. This outperformance on a risk-adjusted   basis is the so-called value premium that Eugene Fama and Kenneth   French first identified in 1992... and That outperformance has, however, come with more risk. Historical   volatility of the pure style indices has been 21-22% compared to 16%   for the market. ... From a maximum drawdown perspective, the 69% drop   of pure value during the financial crisis exceeded the 51% drop of the   overall market." If that condition is permanent -- the stock will NEVER pay dividends and you will NEVER be able to sell it -- then yes, it sounds to me like this is a worthless piece of paper. If there is some possibility that the stock will pay dividends in the future, or that a market will exist to sell it, then you are making a long-term investment. It all depends on how likely it is that the situation will change. If the investment is small, maybe it's worth it. Why wouldn't you expect a long-term profit?  Say you buy 100 shares of company X, selling for$1/share today.  You hold it for 20 years, after which it's worth $10/share (in inflation-adjusted dollars).  So you've made a profit, only making two trades (buy & sell).  What the algorithmic traders have done with short-term trades during those 20 years is irrelevant to you. Now expand the idea.  You want some diversification, so instead of one stock, you buy a bit of all the stocks on whatever index interests you, and you just hold them for the same 20 years.  How has what the short-term traders done in the intervening time affected you? The highest growth for an investment has historically been in stocks. Investing in mature companies that offer dividends is great for you since it is compound growth. Many oil and gas companies provide dividends. "The Investment Entertainment Pricing Theory (INEPT) has this bit to note: The returns of small growth stocks are ridiculously low—just 2.18   percent per year since 1927 (versus 17.47 percent for small value,   10.06 percent for large growth, and 13.99 percent for large value). Where the S & P 500 would be a blend of large-cap growth and value so does that meet your ""beat the market over the long term"" as 1927-1999 would be long for most people." I think it's safe to say that Apple cannot grow in value in the next 20 years as fast as it did in the prior 20. It rose 100 fold to a current 730B valuation. 73 trillion dollars is nearly half the value of all wealth in the world.  Unfortunately, for every Apple, there are dozens of small companies that don't survive. Long term it appears the smaller cap stocks should beat large ones over the very long term if only for the fact that large companies can't maintain that level of growth indefinitely.  A non-tech example - Coke has a 174B market cap with 46B in annual sales. A small beverage company can have $10M in sales, and grow those sales 20-25%/year for 2 decades before hitting even $1B in sales. When you have zero percent of the pie, it's possible to grow your business at a fast pace those first years. Obviously, these numbers can never be absolute simply because not all the information is public. Any statistic will most likely be biased. I can tell you the following from my own experience that might get you closer in your answer: Hence, even though I cannot give you exact numbers, I fully agree that traders cannot beat the index long term. If you add the invested time and effort that is necessary to follow an active strategy, then the equation looks even worse.  Mind you, active trading and active asset allocation (AAA) are two very different things. AAA can have a significant impact on your portfolio performance. "Can you easily stomach the risk of higher volatility that could come with smaller stocks? How certain are you that the funds wouldn't have any asset bloat that could cause them to become large-cap funds for holding to their winners? If having your 401(k) balance get chopped in half over a year doesn't give you any pause or hesitation, then you have greater risk tolerance than a lot of people but this is one of those things where living through it could be interesting. While I wouldn't be against the advice, I would consider caution on whether or not the next 40 years will be exactly like the averages of the past or not. In response to the comments: You didn't state the funds so I how I do know you meant index funds specifically? Look at ""Fidelity Low-Priced Stock"" for a fund that has bloated up in a sense. Could this happen with small-cap funds? Possibly but this is something to note. If you are just starting to invest now, it is easy to say, ""I'll stay the course,"" and then when things get choppy you may not be as strong as you thought. This is just a warning as I'm not sure you get my meaning here. Imagine that some women may think when having a child, ""I don't need any drugs,"" and then the pain comes and an epidural is demanded because of the different between the hypothetical and the real version. While you may think, ""I'll just turn the cheek if you punch me,"" if I actually just did it out of the blue, how sure are you of not swearing at me for doing it? Really stop and think about this for a moment rather than give an answer that may or may not what you'd really do when the fecal matter hits the oscillator. Couldn't you just look at what stocks did the best in the last 10 years and just buy those companies? Think carefully about what strategy are you using and why or else you could get tossed around as more than a few things were supposed to be the ""sure thing"" that turned out to be incorrect like the Dream Team of Long-term Capital Management, the banks that were too big to fail, the Japanese taking over in the late 1980s, etc. There are more than a few times where things started looking one way and ended up quite differently though I wonder if you are aware of this performance chasing that some will do." "Bravo!!! Too bad if a few big, slow, ancient fund managers, who can barely anticipate what day it is, much less when to make a move, can't keep up, wahhh. They have had enough cake. The world will be a VERY different place financially in 20 years and that's life. Look, it's all pretty simple and it works like this: When stocks are UP, buy real estate (NOW). When real estate is UP, buy stock (this is what you do next). Anyone who says different is probably still using credit.  ""Everyday I'm hustlin"" -R. Ross" From Dimson, Elroy, Paul Marsh, and Mike Staunton. Triumph of the Optimists: 101 Years of Global Investment Returns. Princeton, N.J: Princeton University Press, 2002: Disappointingly, the small firm effect has not proved the road to   great riches since soon after its discovery, the US size premium went   into reverse. This was repeated in the United Kingdom and virtually   all other markets around the world. Despite their disappointing performance in recent years, the very   long-run record of small-caps remains one of outperformance in both   the United States and the United Kingdom. Furthermore, mid- and   small-size companies are still an important asset class. Their   differential performance over long periods of history shows that there   is useful scope for investors to reduce risk by diversifying across   the “large” and the “small” capitalization sectors of the market.   Furthermore, given the pervasiveness of the size effect across the   entire size spectrum, it is important to all investors since the   size tilt of any portfolio will strongly influence its short- and   long-run performance. This holds true whether there is a size premium   or a size discount. The size effect has certainly proved persistent   and robust. What is at issue is whether we should continue to expect a   size premium over the longer haul. And accompanying charts:    And one chart from BlackRock: Consider the price history to be the sum of short term movements and long term movements. If you hold a stock for a long time you will benefit (or lose) from its long term movement.  If a sufficiently large and very good short term trader existed he would tend to reduce short term volatility, eventually to nearly zero. At that point, the price would rise gently over the course of the day in line with the long term variation in price. Presumably robot traders will increase the time horizon of their trades when they have exhausted the gains they can make from short term trades. The markets are based on a growing population, so yes, revenue growth is possible to continue alongside that into perpetuity.    I know this subreddit is known for their lack of actual basic business foundations, but jesus christ.