Why stocks go up
🔸 Plus: Coffee makes men sociable and women better looking, allegedly 🔸 “Why are default UK pension funds so bad?” 🔸 What happens when you fail to file a “self-assessment” tax return with HMRC 🔸
Your 2-minute guide to demystifying money and making you richer
The markets, year-to-date
S&P 500: 5,996.66 ⬆️ 1.96%
FTSE 100: 8,505.22 ⬆️ 2.97%
Bitcoin: $105,097.00 ⬆️ 12.45%
GBP to USD: $1.2175 ⬇️ 2.74%
GBP to EUR: €1.1846 ⬇️ 2.04%
(As of Friday market close.)
Why stocks always seem to go up
Over the last 30 years, the S&P 500 — an index of the largest companies trading on the U.S. markets — has looked like this:
It has gained 3,331% in that period. Yes, there have been ups and downs. The market declined for two straight years following the dotcom crash of 2000 and did not regain a new high until 2007. But you don’t have to be a maths genius to look at that chart and realise there is a pattern: In general, stocks go up.
Why?
It turns out that the economy — capitalism, if you will — is designed to do pretty much one thing: grow.
Here’s a chart showing the growth of Ukraine’s gross domestic product (GDP — the sum of all its economic activity in a year). You’ll notice that Ukraine’s economic growth took a hit in 2014 and 2022 but growth resumed after that. In those years, Russia invaded Ukrainian Crimea (2014) and then the Ukrainian mainland (2022). Russian troops have been there ever since, literally trying to destroy the country.
And yet the Ukrainian economy has dusted itself off and resumed chugging along, at growth rates that are (embarrassingly) greater than Britain’s.
Clearly, capitalism is a robust beast and somehow manages to find growth even under the worst conditions.
Again, why is this?
We’ve noted before on Moneyin2 that under capitalism people occupy one or more of three categories:
The capitalists, whose money funds companies in hopes of making a profit. No one invests £100 in a business in the hopes of only getting £70 back. The capitalists are very, very focused on funding only the type of activity that results in profitable growth.
The workers are likewise incentivised to earn as much money as possible. Workers are constantly asking for pay rises and promotions. And if they don’t get them they’re likely to switch to higher-paying jobs or even take on more work in the form of overtime or a second job. They want their bank accounts to grow.
The consumers, whose money funds the other two groups of people, are also usually buying up. No one chooses to trade a good new car for an older, crappy one. People generally prefer to replace their old stuff with better quality new stuff — and this activity generates the financial growth that ends up in the pockets of the workers who produce those goods and services and the capitalists whose investment money kickstarted the process in the first place.
Under capitalism, literally no one is incentivised to get poorer. That’s why GDP has a stubborn tendency to rise even under adverse conditions.
Stocks don’t represent the economy as a whole
Stocks represent only the larger companies in that economy. And the price of stocks in reality represents investors’ guesses about the future. But once you understand the Ukraine situation — or the long-term rise in the value of stocks generally, or the way that capitalism is geared to grow come what may — it’s obvious that betting stocks will go down, in the long run, is probably a bad bet.
And this is why stocks are good for someone saving and investing over the long term. Stocks return far more than interest on cash in the bank over the long term. On average, the S&P 500 grows by 10% per year.
And while there are ups and downs, if you want financial independence and security in the future you probably need to be in stocks.
The Moneyin2 Guide to Wealth
The Moneyin2 Guide to Wealth will get you the biggest return on your savings by maximising cash matches from your employer, free cash from the government, and shielding your investment gains from tax. It takes you step-by-step through the world of pensions, SIPPs, ISAs and ETFs — all in plain English.
And for dessert …
Coffee makes men more sociable and women better looking, according to a bizarre study from Portugal that looked at what happens when people are confined to drinking caffeinated vs decaffeinated coffee.
“Why are default UK pension funds so bad?” An interesting discussion on Reddit about why Brits make such bad choices with their pension savings.
What happens when you fail to file a “self-assessment” tax return with HMRC, if you are self-employed or a high earner. You get fined a lot of money, basically.
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