Is it theoretically possible for the market to NOT go up long-term?

[CientoUno]

Forgive me if this is a contagiously stupid thing to ask, but I'm just starting to educate myself on matters of investing. I've spent weeks poring through JLCollinsNH and MMM, and thanks to their abilities to explain things to those of us educated in fields other than business, I'm starting to get really interested in setting myself up for the best possible future (early retirement maybe??)

The simple approaches to investing appropriate for a mid-20s guy like me with not much financial knowledge (yet!) goes on the supposition that index funds are fantastic, because effectively the market will always go up, overall. I understand everything I've read on this. Sometimes it's low, but in the long run, it'll always get higher. And I've seen the graphics of the DJIA since it's inception being an impressive line that jaggedly shoots relentlessly up and up. All this is why I plan on throwing 10K into VTSAX and getting that ball rolling as soon as I'm back in the USA. (I live abroad currently and have about 15K to my name)

But here's my question: Is it theoretically (or perhaps, a better word to use would be "practically") possible for the market to not go up?

Is there any realistic chance for a 20-30 year stint in VTSAX, with regular contributions and riding out the storms, to result negatively? I don't mean me losing nerve and selling during a low point-- I know better than that and have the luxury of time to wait things out. Rather, I mean for the market to drop and stay fluctuating around a lower point long-term.

Appreciate it, folks. You're helping to educate a very enthusiastic newbie!

[MDM]

Sure.  Look at the past 25 years of the Nikkei: http://finance.yahoo.com/echarts?s=^n225#{%22useLogScale%22:true,%22range%22:%22max%22,%22allowChartStacking%22:true}

[CientoUno]

See, that's the kind of thing that makes me nervous. What leads people to believe that won't happen with a fund like VTSAX?

[MDM]

See, that's the kind of thing that makes me nervous. What leads people to believe that won't happen with a fund like VTSAX?

Want to feel worse?  Read http://www.davemanuel.com/2009/04/16/20-years-later-and-the-nikkei-225-still-hasnt-recovered-or-come-even-close-to-recovering/

Want to feel better?  Reread the above article, noting the date and comments about the Dow, S&P 500, and NASDAQ indices, then see http://www.google.com/finance?client=news&gl=us and note those index values now.

[FFA]

i think it's a good question actually. it's best not to assume anything. well done for asking.

I don't know if I have a good answer myself, except to say the share markets should reflect the underlying economies that the companies operate in (and the global economy since everything is globalized these days). So perhaps we need to think about driving forces for "real" economic growth (e.g. population growth, technology, efficiency, etc). We might expect mature economies to grow at slower rates than emerging ones. And failing economies can easily stagnate or go backwards.

It seems to me we might be hitting these limits now. The global economy can't seem to heal itself without financial life supports. We might need to get used to slower growth rates, as some have been warning, and interest/inflation rates indicate.

I guess you might take comfort from the idea these pessimistic scenarios will likely also involve deflation, cheaper housing/ living costs, etc.

[dungoofed]

A lot of pain can be avoided with some international diversification. There is a Bogleheads thread here which touched on the Japan case: https://www.bogleheads.org/forum/viewtopic.php?t=163600 but it applies no matter where you are.

Having said that, to a fair extent growth is based on the assumption of increased consumption, some due to population growth.

[DaveR]

Let's say it was 1989 Japan and you took your $10k and dumped it all in the Nikkei at the peak.

Scenario #1: no additional investments, just waiting. Right now you'd have ~$5k (50% loss)

Scenario #2: you invest $100/mo, through all the ups and downs ($31k over 26 yrs). Right now, your $41k invested would be ~$49k (19% gain)

Scenario #3: you diversify, putting your $100/mo into a diversified mix of debt and equity (US, international) and rebalance annually. Your $41k invested turns into $108k (163% gain). You can argue the mix (so maybe not 163% over 26yr), but can't argue that diversification and rebalancing will smooth the bumps.

Is there any realistic chance for a 20-30 year stint in VTSAX, with regular contributions and riding out the storms, to result negatively?

Maybe, depending on what "realistic" means to you. There is a chance, but it's small. Counter that small chance with regular contributions plus diversification with rebalancing.

Edit: scenarios in nominal dollars, ignoring dividends. Inflation hurts and dividends help, but don't change the overall positive effects of contributions and diversification.

[Aphalite]

See, that's the kind of thing that makes me nervous. What leads people to believe that won't happen with a fund like VTSAX?

Because Companies will continue to grow earnings due to 1) population growth 2) the rise of the absolute level of living standard in poorer countries and economies (and even in mature economies, who would have thought smart phones were a daily necessity owned by everyone from the poor to the rich even ten years ago?) and 3) continual improvements in the level of technology

[solon]

Let's say it was 1989 Japan and you took your $10k and dumped it all in the Nikkei at the peak.

Scenario #1: no additional investments, just waiting. Right now you'd have ~$5k (50% loss)

Are you including dividends in this?

[sol]

From today's valuations? No, no chance.

In the far future I suppose it's possible that the index could rise 1000% in 18 months and then crash and take 30 years to reach those same valuations again, but that's a result of unnaturally high bubbles temporarily inflating the price, not long term negative growth.  That's what happened in Japan.

On the other hand, in the very long term I think negative growth is guaranteed.  Economies and nations will crumble.  The sun will explode.  Eventually the last sentient life form in the universe will die, and at that moment their portfolio will lose its last penny.

But in the meantime, on the scale of our little lives, I don't worry.  A long as humanity continued to strive for something, investment economies will continue to grow despite the inevitable setbacks.

[Tyler]

Is there any realistic chance for a 20-30 year stint in VTSAX, with regular contributions and riding out the storms, to result negatively?

Historically speaking, there have been multiple 20-year stretches where a US stock market investor lost money in real terms.  But wait long enough and things tend to even out. 

Including taxes: http://www.crestmontresearch.com/docs/Stock-Matrix-Taxpayer-Real1-11x17.pdf
Excluding taxes: http://www.crestmontresearch.com/docs/Stock-Matrix-Tax-Exempt-Real3-11x17.pdf

So it really depends on your definition of "long-term". 

[Jack]

There are events that could cause even worldwide-diversified investments to fail long-term, but at that point the "ammo and canned food" portfolio is the only one that matters anyway and thus they aren't worth worrying about.

[fattest_foot]

There are events that could cause even worldwide-diversified investments to fail long-term, but at that point the "ammo and canned food" portfolio is the only one that matters anyway and thus they aren't worth worrying about.

This is the only correct answer.

Even in a situation where the markets remain flat for 20-30 years, what's your other option? Bonds with their almost negligible rates? Good luck! Your best bet is equities.

[aspiringnomad]

From today's valuations? No, no chance.

In the far future I suppose it's possible that the index could rise 1000% in 18 months and then crash and take 30 years to reach those same valuations again, but that's a result of unnaturally high bubbles temporarily inflating the price, not long term negative growth.  That's what happened in Japan.

This, plus demographics. Demography is destiny, and Japan has been getting very old and has very little immigration to offset that aging. While the US is also getting older, it is in a vastly better position. In fact, the US is in a better position than almost the entire developed world from a demographic standpoint, and that's one reason I think that our relatively higher stock market valuations are justified.

[beltim]

i think it's a good question actually. it's best not to assume anything. well done for asking.

I don't know if I have a good answer myself, except to say the share markets should reflect the underlying economies that the companies operate in (and the global economy since everything is globalized these days). So perhaps we need to think about driving forces for "real" economic growth (e.g. population growth, technology, efficiency, etc). We might expect mature economies to grow at slower rates than emerging ones. And failing economies can easily stagnate or go backwards.

This is a very common misconception.  The profitability of investments is not determined by underlying growth of the economy.  Rather, it is determined by the profits earned by those investments.   Over the long term, an investment should return roughly its "earnings yield" – its earnings dividend by its price.  From that point, adjustments can be made for earnings growth, expansion or contraction of market multiples, etc.

Consider an analogy to real estate.  If you hold a piece of investment real estate long enough, the overwhelming determinant of your profit is the rent you can charge.  Sure, if you sell the house after 50 years you might gain (or lose) a couple percent annually, but that amount is dwarfed by the rent you receive.

[Aphalite]

This is a very common misconception.  The profitability of investments is not determined by underlying growth of the economy.  Rather, it is determined by the profits earned by those investments.   Over the long term, an investment should return roughly its "earnings yield" – its earnings dividend by its price.  From that point, adjustments can be made for earnings growth, expansion or contraction of market multiples, etc.

Consider an analogy to real estate.  If you hold a piece of investment real estate long enough, the overwhelming determinant of your profit is the rent you can charge.  Sure, if you sell the house after 50 years you might gain (or lose) a couple percent annually, but that amount is dwarfed by the rent you receive.

I disagree here - the earnings yield will determine your short term returns (akin to deep value investing, buying extremely cheap), as if you extracted all cash out of the investment/company and never reinvested it. In the long term, your return on invested capital (or unlevered return on equity) determines the actual investment return. In an extreme example, an investment can have very low earning yield (let's say 3%, or 33 P/E upon initial purchase), but if it's growing at 50% a year in the long term, you'll end up with a hell of a result at the end (even if you factor in market multiple contraction) - however, buying such an investment gives you no margin of safety since anything LESS than 50% a year growth will result in severe capital loss as the multiple reverts to the mean in a hurry

[beltim]

This is a very common misconception.  The profitability of investments is not determined by underlying growth of the economy.  Rather, it is determined by the profits earned by those investments.   Over the long term, an investment should return roughly its "earnings yield" – its earnings dividend by its price.  From that point, adjustments can be made for earnings growth, expansion or contraction of market multiples, etc.

Consider an analogy to real estate.  If you hold a piece of investment real estate long enough, the overwhelming determinant of your profit is the rent you can charge.  Sure, if you sell the house after 50 years you might gain (or lose) a couple percent annually, but that amount is dwarfed by the rent you receive.

I disagree here - the earnings yield will determine your short term returns (akin to deep value investing, buying extremely cheap), as if you extracted all cash out of the investment/company and never reinvested it. In the long term, your return on invested capital (or unlevered return on equity) determines the actual investment return. In an extreme example, an investment can have very low earning yield (let's say 3%, or 33 P/E upon initial purchase), but if it's growing at 50% a year in the long term, you'll end up with a hell of a result at the end (even if you factor in market multiple contraction) - however, buying such an investment gives you no margin of safety since anything LESS than 50% a year growth will result in severe capital loss as the multiple reverts to the mean in a hurry

I used earnings yield as an easily accessible proxy for the best measure – I prefer Warren Buffet's concept of "owner earnings" but return on invested capital also works.  The larger point is that it is business profits – over the course of your investment – that determines your investment returns.  It is NOT determined by the "growth of the economy" as FFA suggested.

[Aphalite]

It is NOT determined by the "growth of the economy" as FFA suggested.

Okay, I agree with that

[FFA]

i think it's a good question actually. it's best not to assume anything. well done for asking.

I don't know if I have a good answer myself, except to say the share markets should reflect the underlying economies that the companies operate in (and the global economy since everything is globalized these days). So perhaps we need to think about driving forces for "real" economic growth (e.g. population growth, technology, efficiency, etc). We might expect mature economies to grow at slower rates than emerging ones. And failing economies can easily stagnate or go backwards.

This is a very common misconception.  The profitability of investments is not determined by underlying growth of the economy.  Rather, it is determined by the profits earned by those investments.   Over the long term, an investment should return roughly its "earnings yield" – its earnings dividend by its price.  From that point, adjustments can be made for earnings growth, expansion or contraction of market multiples, etc.

Consider an analogy to real estate.  If you hold a piece of investment real estate long enough, the overwhelming determinant of your profit is the rent you can charge.  Sure, if you sell the house after 50 years you might gain (or lose) a couple percent annually, but that amount is dwarfed by the rent you receive.

I didn't mean to imply cause and effect. Agree share prices are determined by corporate earnings. These corporate earnings come from somewhere. Companies produce goods & services, for which they need a lot of customers, employees, etc. At the aggregate level, the sum of all publicly listed companies can be a large chunk of the economy. In the long term of 20-30 years being discussed here, I personally would expect some linkage between the economies growth and corporate earnings growth at the aggregate level (not specific companies, the entire listed market). In the short term, or even up to 5-10 years, I wouldn't link the two. And often shake my head when share prices swing wildly on quarterly GDP stat's.

[Left]

i hear things like buy while markets are down... and low markets are a buying opportunity...

so why arent people buying nikkei? seems like it would be a good buying opportunity until it isnt...?
at what point in time is the switch made? what if the US never came out of 2008 crash? would people keep rebalancing to US? how many years would they keep hoping that recovery will happen?

i read over on bogleheads that a lot seem to think 100% US is fine, but because of what happened in japan and me never knowing if US will do same, i am 100% VT now. i just didnt want to mess with vti/vxus. yes i know i get a lower yield than pure vti... but if i wanted, i could also diversify even less and stock pick as well but i dont.

edit: also at present time, europe isnt doing so good... why arent the foreign markets being sold as a buy opportunity? a lot cheaper than us if you feel like they will recover in future

[beltim]

I personally would expect some linkage between the economies growth and corporate earnings growth at the aggregate level(not specific companies, the entire listed market). In the short term, or even up to 5-10 years, I wouldn't link the two. And often shake my head when share prices swing wildly on quarterly GDP stat's.

There is a link between economic growth and corporate earnings growth (but far from fixed – the percentage of an economy that goes to corporate profits varies over time and among countries).  The problem is that the amount of earnings is more important to stock returns than the growth in earnings.  This leads to the well-researched conclusion that there isn't a correlation between economic growth and stock returns:
http://psc.ky.gov/pscecf/2012-00221/rateintervention@ag.ky.gov/10252012f/MSCI_-_BARRA_-_GDP_Growth_and_Equity_Returns_-_2010_--_SSRN-id1707483%5B1%5D.pdf
http://www.economist.com/blogs/buttonwood/2009/08/the_growth_illusion
http://seekingalpha.com/article/1541782-s-and-p-earnings-decoupled-from-gdp-growth-and-linked-to-the-stock-trend

[innerscorecard]

Yes, relative to the opportunity cost of cash, which sometimes is more real than it is now.

[beltim]

i hear things like buy while markets are down... and low markets are a buying opportunity...

so why arent people buying nikkei?

Because it's still expensive relative to other countries.

i read over on bogleheads that a lot seem to think 100% US is fine, but because of what happened in japan and me never knowing if US will do same, i am 100% VT now. i just didnt want to mess with vti/vxus. yes i know i get a lower yield than pure vti... but if i wanted, i could also diversify even less and stock pick as well but i dont.

edit: also at present time, europe isnt doing so good... why arent the foreign markets being sold as a buy opportunity? a lot cheaper than us if you feel like they will recover in future

Some people are suggesting that investing in foreign markets is good.  But it's not that much cheaper than US markets - 10-20% if I recall correctly.

[FFA]

I personally would expect some linkage between the economies growth and corporate earnings growth at the aggregate level(not specific companies, the entire listed market). In the short term, or even up to 5-10 years, I wouldn't link the two. And often shake my head when share prices swing wildly on quarterly GDP stat's.

There is a link between economic growth and corporate earnings growth (but far from fixed – the percentage of an economy that goes to corporate profits varies over time and among countries).  The problem is that the amount of earnings is more important to stock returns than the growth in earnings.  This leads to the well-researched conclusion that there isn't a correlation between economic growth and stock returns:
http://psc.ky.gov/pscecf/2012-00221/rateintervention@ag.ky.gov/10252012f/MSCI_-_BARRA_-_GDP_Growth_and_Equity_Returns_-_2010_--_SSRN-id1707483%5B1%5D.pdf
http://www.economist.com/blogs/buttonwood/2009/08/the_growth_illusion
http://seekingalpha.com/article/1541782-s-and-p-earnings-decoupled-from-gdp-growth-and-linked-to-the-stock-trend

thanks beltim, I appreciate your feedback. i'd be interested to hear your ideas/thoughts on the OP's question, if you have any ?

[frugal_c]

OP, possible but the scenario where it happens, probably most assets are worth little to nothing.  If you look around the web you can find country specific summaries of how well their stock markets did in the 20th century, there are a few countries that in the end went nowhere for decades or even went to 0 but usually it involves the second world war or a major revolution.

Still, while it's unlikely it's still probably best to diversify.  I would hold a certain percentage in short-term bonds, these provide minimal protection against inflation but they are safe and right now the extra premium from longer bonds isn't worth the risk (they go down more than short term bonds if yields rise).   I would want to own my own home, if all goes to hell there is at least a chance that you will still have a home.   Develop your work skills, this is probably the best way to "diversify".   As your net worth grows it wouldn't hurt to hold a SMALL amount, say 1-2% in physical gold in case things completely go astray.   All that being said, I would do these things to make myself feel more comfortable but you can never cover everything so just know that in the vast majority of cases stocks are the way to go long-term.

[Tom Bri]

If this is still a worry after you learn more, consider concentrating on stocks that consistently pay good dividends. Between that and the ever-popular Vanguard funds, you have some protection. I consider the stock market as my hedge against inflation, and also hope for some real increases in value.
In the end, you have to put your money somewhere, and no place is ever 100% safe.

[mr_orange]

Since the question was posed as something that is theoretically possible then yes....it is possible for the market to return zero (or less than zero) for any length of time you wish to select.  Past performance is not an indicator of future performance and nobody has a crystal ball. 

However, you have to ask yourself what the alternative is to investing in index funds or other investments.  There is a far greater likelihood that holding cash will return less than zero than the same risk holding index funds.  Inflation will erode the value of your cash with virtual certainty.  If you compare this risk with that of dollar cost averaging in the market and holding for extended periods of time the difference in risk in loss of real purchasing power on your dollars is orders of magnitude greater for holding cash than it is for investing over long periods of time in small amounts. 

[beltim]

thanks beltim, I appreciate your feedback. i'd be interested to hear your ideas/thoughts on the OP's question, if you have any ?

No problem!

I think sol pretty much nailed this question earlier:

From today's valuations? No, no chance.

In the far future I suppose it's possible that the index could rise 1000% in 18 months and then crash and take 30 years to reach those same valuations again, but that's a result of unnaturally high bubbles temporarily inflating the price, not long term negative growth.  That's what happened in Japan.

If the S&P 500 traded at a PE of 78 the way the Nikkei did at its peak then the story changes.  In a 20 year period starting from the peak of a bubble, then changes in valuation can overwhelm the earnings of your investment.  But to again use a real estate analogy, that's like buying a house that would only rent for 1.3% of its value per year.  It's theoretically possible to make money from an investment like that, but you would be entirely dependent on speculation, not on any sound investing principles.

[CorpRaider]

http://awealthofcommonsense.com/playing-the-probabilities/

It's theoretically possible that we will be eating alpo, driving dodge chargers with NO2 boosters, carrying sawed off shotguns and speaking with Australian accents in the future, but short of sticking a gun in the closet, not sure how that should impact your plans.  I figure if I own some treasuries, I can maybe swap/forgive those for an M-16 or a black hawk or something if shit gets real.

[frugal_c]

I found this link which discusses the returns on US equities back to the early 1800's.   So you have 3 70 year periods in a row where equities averaged 5-6 percent.   However, it is interesting that government bonds actually provided great returns in that first 70 year period but then have worked their way down to near nothing.   You do have to wonder, if there can be such a dramatic divergence in bonds, then perhaps stocks could see something similar as well.   This is one more reason why you want to diversify between domestic/international stocks and domestic / international bonds.   You don't want the next 20 years to be that one period where bonds substantially out-perform equities.

"Over the subperiods 1802-70, 1871-1925 and 1926-90, the real compound annual returns on equity were 5. 7, 6.6 and 6.4 per cent, but the real returns on short- term government bonds
dropped from 5.1 to 3.1 and, finally, 0.5 per cent"


Here is the link if you are interested. http://efinance.org.cn/cn/fm/The%20Equity%20Premium%20Stock%20and%20Bond%20Returns%20since%201802.pdf

[nobodyspecial]

Slightly edging toward the paranoid - but is there a chance that the US economy could grow but not in the public markets.
The growth of unicorns (>$1Bn private funded silicon valley companies), the lack of IPOs, share buy backs, Dell going private

Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell,  it could be a bigger drop to the market than the Great Financial Crash

[sol]

Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell,  it could be a bigger drop to the market than the Great Financial Crash

I don't think that's paranoid, I think it's an interesting observation.  The growth of private equity absolutely threatens the future growth of the publicly available market, if the most profitable firms see a benefit in it.

I suspect that can only happen in cases where the distribution of wealth is already so grossly unequal that it probably doesn't matter much, though.  By the time an economy has enough of its production capacity privately held to negatively impact market prices, I suspect it is only months away from guillotines and violent revolution anyway.

[beltim]

Slightly edging toward the paranoid - but is there a chance that the US economy could grow but not in the public markets.
The growth of unicorns (>$1Bn private funded silicon valley companies), the lack of IPOs, share buy backs, Dell going private

Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell,  it could be a bigger drop to the market than the Great Financial Crash

Like sol, I don't think this is paranoid.  Unlike sol, I don't see any reason that companies going private would result in a market crash.

Think about it: to take, say, Apple private, the company has to buy all available shares.  They have two ways to do this:
1) Buy on the open market.  This would drive the price crazily high, as holding on to the last 10% of shares would be unbelievably valuable.
2) Have a vote of majority of shareholders to go private, which would force all shareholders to sell their shares.  This would still result in every shareholder realizing a significant gain – otherwise, they wouldn't agree to sell.

Companies going private would provide substantial profits to shareholders.

Also, as I mentioned up-thread, economic growth is not related to growth in stock prices.  It just isn't. 

[sol]

Unlike sol, I don't see any reason that companies going private would result in a market crash... economic growth is not related to growth in stock prices.  It just isn't.

I wasn't so much thinking about the market crashing from private equity buying existing shares.  I was considering private equity acquiring the last few remaining firms that show any growth at all, in an economy where only a few firms become supergiant megacorps, and thus owning a disproportionate share of all future economic growth.  I agree there would be profit for holders of public shares in the short term, but that doesn't change the point.

[beltim]

Unlike sol, I don't see any reason that companies going private would result in a market crash... economic growth is not related to growth in stock prices.  It just isn't.

I wasn't so much thinking about the market crashing from private equity buying existing shares.  I was considering private equity acquiring the last few remaining firms that show any growth at all, in an economy where only a few firms become supergiant megacorps, and thus owning a disproportionate share of all future economic growth.  I agree there would be profit for holders of public shares in the short term, but that doesn't change the point.

Well then I'll re-reiterate my earlier point:

Also, as I mentioned up-thread, economic growth is not related to growth in stock prices.  It just isn't. 

So unless you think private equity would be buying up all profitable companies then I don't really see a problem.

[mr_orange]

There are hundreds of allied angel networks nationally where you can access the same types of deal flow that the private equity firms can access.  Angellist, SeedInvest, Crowdfunder, etc. all have access to early-stage companies too.  With crowdfunding disrupting how capital forms in these markets you can also spread your investment out considerably and hedge much of the risk of the early-stage financing. 

And yeah....this takes time and expertise and thus people will say it is a job on this forum.  The opportunity is there to invest in these ventures though. 

I don't see all of the great companies on the public exchanges delisting and going private anytime soon.  Some companies will do this for strategic reasons, but there is still plenty of money sloshing around in the public equities market at really low costs for the companies relative to how they can put it to work.  This won't change anytime soon. 

[brooklynguy]

So unless you think private equity would be buying up all profitable companies then I don't really see a problem.

Yeah, and even if the concern were that we could reach some sort of tipping point somewhere short of the taking-private of profitable industry in its entirety, I would think the problem would tend to be self-correcting because it would always remain an attractive exit strategy for private equity buyers to re-IPO the businesses they acquired.

[nobodyspecial]

There are hundreds of allied angel networks nationally where you can access the same types of deal flow that the private equity firms can access.

Except you are limited to all the startups that professional VCs turned down.  Nobody is doing crowd funding if Andreessen, Horowitz or Khosla said yes. Ironically all the rules to protect the little guy (S-O, accredited investor qualification) means that the public can only play in the worst bets.
 

  Some companies will do this for strategic reasons, but there is still plenty of money sloshing around in the public equities market at really low costs for the companies relative to how they can put it to work. 

There is a lot more money sloshing around not in the public markets and not going to the market means a lot of freedom from Wall St and quarterly targets.
 
I think a bigger risk is that many growth companies will never enter the public market and so there is no opportunity for the public to benefit from their growth. An Apple or Microsoft formed today might never need to IPO.

If only VCs and accredited investors can profit from the fastest growing part of the economy then all the regular private and most institutional investors are left chasing shares in legacy industries.
 

[mr_orange]

Except you are limited to all the startups that professional VCs turned down.  Nobody is doing crowd funding if Andreessen, Horowitz or Khosla said yes. Ironically all the rules to protect the little guy (S-O, accredited investor qualification) means that the public can only play in the worst bets.

This is absolutely not true.  Some of the smarter entrepreneurs do their best to AVOID toxic venture financing where they end up working for the financier.  In fact, most of the companies that exit successfully don't ever take venture financing at all. 

Accreditation will also be broken down significantly in May of 2016.  Title III of The JOBS Act is now the law of the land and just needs to pass the waiting period post filing in the federal registrar to become something that can be used.  Portal registration will begin on January 29th of 2016.  Access to deal flow by an average investor has never been more open. 

Now we can argue about whether or not this is a good thing or the people investing have the sophistication to invest in these types of projects.  There are also constraints about how much non-accredited investors can invest under Title III as well.  However, I don't see how one can argue that folks will only get access to stuff the professionals turn down.  This simply is not the case. 

[sol]

So unless you think private equity would be buying up all profitable companies then I don't really see a problem.

That's precisely the scenario I was proposing; a future economy in which the vast majority of companies are no longer competitive due to the growth of megacorporation congolomerates, which are privately held and basically own all economic growth in in a form that is no longer publicly traded.

[Tom Bri]

[/quote]That's precisely the scenario I was proposing; a future economy in which the vast majority of companies are no longer competitive due to the growth of megacorporation congolomerates, which are privately held and basically own all economic growth in in a form that is no longer publicly traded.
[/quote]

Don't see this as too likely. Mergers and acquisitions follow a wave pattern, in between periods of divestment. Companies get too big, become unprofitable, and sell off or are broken up into smaller units. More likely to occur in highly regulated economies, where the ability to influence regulators is more important than pleasing consumers. 

[sol]

Don't see this as too likely.

I agree, it's unlikely. 

[nobodyspecial]

Don't see this as too likely. Mergers and acquisitions follow a wave pattern, in between periods of divestment. Companies get too big, become unprofitable, and sell off or are broken up into smaller units. More likely to occur in highly regulated economies, where the ability to influence regulators is more important than pleasing consumers.

True if they are a single company in a single market but less obviously true for a Berkshire Hathaway or a VC or Google-Alphabet.

You can see a blurring of the lines between a VC/Hedge fund/Holding company getting a lot of power  - especially if the growth companies they are buying aren't on the public market.

[Yankuba]

Slightly edging toward the paranoid - but is there a chance that the US economy could grow but not in the public markets.
The growth of unicorns (>$1Bn private funded silicon valley companies), the lack of IPOs, share buy backs, Dell going private

Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell,  it could be a bigger drop to the market than the Great Financial Crash

Zero Hedge always jokes that with the explosion of stock buybacks over the past decade people better get their feet in the market sooner rather than later because in the future there won't be any stocks left to buy.

[CientoUno]

OP here. Not going to lie... this kind of went places I don't entirely understand, but I appreciate the feedback. Overall it seems like, barring any pretty unforeseen circumstances, it's relatively safe to continue assuming growth overall. I suppose at some point the stock market would have to look different from it's current form, but who can say where in time that will occur. I feel pretty confirmed for some good ol' Mustachian optimism here.

And hey, as someone said, assuming consistent additions to the pot, it doesn't sound like any losses would be so severe as to be any worse than what inflation would do to money sitting in a bank account anyway. Cheers guys!

(Please by all means though, pay this no mind and continue your discussion)

[adamwoods137]

]Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell,  it could be a bigger drop to the market than the Great Financial Crash

I'm trying to figure out what you mean here.  You do realize if these companies took themselves private that they'd pay for their shares, right?  Further you realize that this money would be reinvested in the rest of the index?  Not sure what would cause the drop.  I suppose you'd take an embedded gains tax hit, but that wouldn't be more than like 1% of your investment, so I'm not sure I follow the reasoning.

[sol]

]Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell,  it could be a bigger drop to the market than the Great Financial Crash

I'm trying to figure out what you mean here.  You do realize if these companies took themselves private that they'd pay for their shares, right?  Further you realize that this money would be reinvested in the rest of the index?  Not sure what would cause the drop.  I suppose you'd take an embedded gains tax hit, but that wouldn't be more than like 1% of your investment, so I'm not sure I follow the reasoning.

Several people here seem to have this same source of confusion, so let me offer my attempt at an explanation.

Yes, I realize they would buy the shares at today's price.  The hypothetical scenario we're discussing is that after they have done so, those privately held corporations come to dominate the entire economy and the funds reinvested elsewhere by you and me become unprofitable investments.  If all future economic growth is concentrated in the coffers of privately held companies, then the market index would cease to grow, which would be one way to get the scenario the OP was asking about.

Seems pretty unlikely as of today, but maybe not entirely impossible in the future.  Private equity is a thing, after all.

[Kaspian]

By "the" market, I guess we're assuming the S&P500?  Yes, it's possible that, the international markets, the bond markets and nothing else ever go up in the rest of our lifetimes.  However, there's a greater likelihood of getting hit by car and never seeing your money than the above scenario unfolding.

[James]

]Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell,  it could be a bigger drop to the market than the Great Financial Crash

I'm trying to figure out what you mean here.  You do realize if these companies took themselves private that they'd pay for their shares, right?  Further you realize that this money would be reinvested in the rest of the index?  Not sure what would cause the drop.  I suppose you'd take an embedded gains tax hit, but that wouldn't be more than like 1% of your investment, so I'm not sure I follow the reasoning.

Several people here seem to have this same source of confusion, so let me offer my attempt at an explanation.

Yes, I realize they would buy the shares at today's price.  The hypothetical scenario we're discussing is that after they have done so, those privately held corporations come to dominate the entire economy and the funds reinvested elsewhere by you and me become unprofitable investments.  If all future economic growth is concentrated in the coffers of privately held companies, then the market index would cease to grow, which would be one way to get the scenario the OP was asking about.

Seems pretty unlikely as of today, but maybe not entirely impossible in the future.  Private equity is a thing, after all.

I absolutely agree Sol, unlikely but possible. Think of a dozen Buffetts, picking companies they believe will pay off long term and buying them early. If the companies grow and become huge they own the whole pie, if it doesn't they sell and try again. Think of Apple being bought before going public and never becoming a public stock. That entire company is no longer part of the investment pool for those looking for growth in index funds or individual stock. If enough big profitable companies were private and grew to contain the bulk of economic growth the available, stocks might languish without growth or even lose market share to the point the whole index declines. So I don't see it as a big corporation on the market being bought to become private, I see it as small corporations bought before going public and becoming huge without providing access to new investors.

[mxt0133]

I'm enjoying the hypothetical situation of all profitable companies being private and leaving the majority of investors with unprofitable investments.  At the macro level it seems possible but at the micro level things break down for a couple of reasons making it not just unlikely but to me impossible as it doesn't fit our current economic model.

1) If there only existed a few mega corporations that were all private and profitable, that would leave the majority of people to be poor, because they could not invest into profitable companies.  Sure they could all be working for the profitable companies but the majority wouldn't be able to share in the companies growth.  Who's going to buy the profitable companies products and services if the majority of the people are poor?

2) Mega Corporations are continually challenged by smaller companies because people are entrepreneurial and most talented and smart people would not want to work for mega corporations because they don't have autonomy or equity.  That is why not everyone wants to work for Microsoft, Google or Apple and we have such an abundance of start-ups.

3) There is a reason why we currently don't have only a few mega corporations now given that corporations have been around for hundreds of years.  It because organizations that get to big become to bureaucratic, ones that try to do everything do nothing well and eventually they no longer have any core competencies.  Take ATT for example, even if they were not broken up by the government it would have only been a matter of time until a small start-up like Cisco to start disrupting the market.  One could say that ATT would just buy all of it's competitors but look at the example of Microsoft or Google, they would pay ridiculous premiums, become even bigger and slower, and eventually another start-up would just come along.  IBM is another example that just got too big, the only way they survived was to down size and focus on a few profitable markets.

So overall a nice theory but a theory that is flawed in our current economic environment.