Sunday, May 30, 2010

Stock market returns

Lately Felix Salmon has been arguing against investing in stocks. Some of his arguments make sense, others not so much. Here for example Salmon claims in part:

A lot of people like investing in stocks because the stock market has, in the US, and over the past couple of generations, managed to outperform GDP growth. But that’s not sustainable over the long term. ...

This is one of those assertions which is superficially plausible but falls apart when you start to think about it. Consider for example a steady state economy where GDP is not growing. Does this mean stocks would have to return nothing? I don't see why. Stocks could pay say a 3% annual dividend while not increasing in value. Thus returning 3% a year. Which is more than zero.

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