Does stock market create wealth?

russ_watters

Well, lets take some of the opinion out of it and look at what those probabilities really are:

Lotteries vary, but the average payout appears to be about 50%: http://blog.sfgate.com/pender/2012/0...nia-ranks-low/

That means that over the long-term, the average person can expect a net loss of 50% per play by playing the lottery.

Casino gambling is much better. Some bets have a pay-out of up to about 97%, meaning your loss is only 3% per play over the long term.

The stock market, over its history, has an average annual rate of return of +8%.

So lets say you start with $1000 and make 100 $10 bets the first year on a roulette wheel, then as many as you can after that, using the same pool of money once a year. At the end of 20 years, you can expect to be left with $53.

Similarly, if you buy $1000 worth of a highly diversified, un-managed mutual fund and just ignore it for 20 years, you can expect to be left with $5,030 at the end of that time.

Now neither of these are a guarantee of course, but the longer you stick to the plan, the better your odds are of getting closer to the average. What I can tell you is that never in its history has the US stock market had a 15 year period where a highly diversified group of stocks didn't turn a profit. Not even if you bought a bunch of stocks the day before the 1929 stock market crash. And if you invest the way most people do (a little at a time, at regular intervals), the risk is much, much lower.

Vanadium 50

This obviously must rely on dividends as well as capital gains. Since you have the data, can you check this for the 15-year period ending with the Dow's low of 41.22 in min-1932?

What I find surprising is that this discussion is focused almost entirely on capital gains. Dividends are very important. If I were to buy shares in, say, Coca-Cola, I would get 2.75% of my money in dividends. Even if I believed that the price of KO would be constant over time, this would be a good investment.

russ_watters

Yes. Unfortunately, that's a paraphrase from a book. It doesn't have the actual numbers.
Meh - it was just a specific question.

mheslep

Here's a 15 year window on google finance for the DJI (no dividends) going back to '73. No losses for a 15 year window ever occur, though regrettably the lowest 15 year returns are recent. This past Summer-Fall had 15 year returns of 60-80%, lower even than placing the window close on the bottom of the crash in March 2009.

Tosh5457

That doesn't prove anything, as I said over and over, the stock market being a zero-sum game, excluding dividends, doesn't imply that stocks can't grow in the long term. I could also show a graph of any commodity future that grew for a long time, it doesn't make speculating in commodities futures a non zero-sum game. Somehow I get the impression many people are confounding zero-sum game with a game which in nobody can win.

russ_watters

Tosh, if you read the last few posts, that's a response to a different question.

mheslep

That is to say, for the market (DJI) to be returning traditional 15 year returns it should be well above 20000 now.