I can't think of a better, more meaningful time to appreciate the inevitable upward trajectory of the stock market (and the economy at large) than right now...when it all looks so bleak!! Knowing these truths, and acting upon them, when everything around us seems to be crumbling will give us the power and conviction to get through it not just this time around...but every time after this too! The next few months are going to suck. Companies will be temporarily thrown off their game. The economy will lag. And then all of a sudden, they won't. They'll adapt. The economy will rebound. And the world will advance beyond this. it is the only way. There is nothing on Earth I'm more confident in. - GD
Why Does The Stock Market Consistently Go Up Over Time?
This is an excerpt from How To Avoid HENRY Syndrome: Financial Strategies To Own Your Future:
I’ll answer by having you imagine that just yesterday, let’s say, the stock market lost 20 percent in twenty-four hours (as we know this happens periodically and who knows, maybe it’s happening as you’re reading.)
Are we really saying that overnight, some of the largest and most profitable companies in the world lost 20 percent of their value? Do we really think that overnight, these companies are generating 20 percent less business and their employees are 20 percent less efficient than they were the previous day? Of course not!
The stock market’s temporary peaks and valleys represent mass hysteria and group think about what the future portends rather than being any reflection on the viability of the companies themselves.
These companies are not fundamentally different than they were the previous day just because their price fluctuated. We, as investors, created the dramatic price change through our panicked reactions to the crisis of the moment (whatever that may be and in our current reality, the Coronavirus pandemic).
Thinking about companies purely as stock prices makes investing seem almost like a game, and in games anything can happen. But when we’re investing in the stock market, we’re investing in actual companies and that’s helpful to think about during market corrections.
In fact, from a historical perspective, that’s the reason the stock market continuing to go up is the only rational thing that can possibly happen in the future. Without diverting too much into politics/philosophy, capitalism is inherently logical. Companies exist to be profitable and to make money for their owners and for their shareholders (yes there may be secondary goals, but that is directive number one).
If a company is not profitable for too long a period of time, it will be driven out of business by a better and more efficient business. As a result, the companies that make up the indexes reflecting the “stock market” are going to either keep profiting or be replaced by newer and better companies that will. Either way, the stock market as a whole should continue its upward climb.
Simply put, investing in the stock market means investing your money in the world’s ability to do business: companies are hardwired to continue growing profits over time.
Companies seeking the greatest profit, and adapting and changing and replacing one another as they need to in order to get there, is a feature, and not a temporary bug, of the entire system and it’s what ensures the inevitable upward trend of the stock market, and on a larger level, the advancement of the world economy. Investing in their continued ability to do so is only rational and logical.
Want to learn more? This is an excerpt from my book, How To Avoid HENRY Syndrome: Financial Strategies To Own Your Future.