Personal Finance for Professionals Part II – Investing in Stocks & Bonds
Welcome back to Personal Finance for Professionals Part II, our multi-part series covering Investing in Stocks & Bonds. Last week we learned “How an Investor Makes Money from Stocks“, and today, in Lesson Five, we’ll discuss why the U.S. stock market “always” goes up . . . at least over time. This lesson is a short one. Enjoy!
Understanding Stocks
Why the U.S. Stock Market “Always” Goes Up
As we will demonstrate in the coming chapters, no one can predict the short-term movement of the stock market. Anyone who tells you they know the market will go up or down over a day, week, month, year, or decade is simply lying to you. However, I can confidently say that the stock market always goes up, or at least it has always gone up over time.
Below is a chart of the S&P 500 from 1928 until the end of 2024, which we can use as a proxy for the U.S. stock market. As you can see, it tends to go up and to the right. The value of the S&P was $17.73 at the start of 1928, $40.33 in 1958, $255.94 in 1988, $975.04 in 2018, and it ended 2025 at $6,845. While the market may go up and down over shorter timeframes, it has risen in real terms (after inflation) in every recorded 40-year period.
Think of what has happened over the last 124 years in the U.S. We have had two World Wars, several other armed conflicts, world-changing inventions (electricity, gasoline-powered cars, commercial flights, space travel, antibiotics, the internet, and now AI), and several market crashes. Yet the market has always gone up over time.
The chart above demonstrates how time relentlessly marches on, rendering events so catastrophic we have to capitalize them, as mere blips on the timeline. The Great Depression, WWII, Black Monday, the Great Financial Crisis, and the COVID-19 pandemic hardly matter to the stock market in the passage of time.
So, what do I mean when I say the stock market “always goes up?” Clearly, there are years, and even decades, when the stock market stays flat or goes down, but over longer timeframes, 30-40 years, it has always gone up. This is important to understand because you will invest for 30+ years. The average physician starts their career at around age 30, while the average APP begins in their early 20’s. You may have 30-50 years to invest for your retirement.
Why does the market always go up over time? Three factors contribute to this phenomenon. First, inflation raises prices across the board. Second, new companies are being created every day. And finally, the stock market is self-cleansing.
Inflation
Inflation is an increase in the prices of goods and services over time due to a currency’s devaluation. Inflation is why, as a child, your great-grandfather paid a nickel for the same Hershey’s bar that I bought for $0.50 and now costs you $1.32. Because prices rise over time due to inflation, companies’ earnings will naturally increase, which in turn leads to higher stock prices. Unless corporate profits increase, these gains may be nominal (not inflation-adjusted) rather than real (inflation-adjusted), but inflation will nevertheless cause stock prices to rise over time.
New Companies
New companies are created in the U.S. every day. Some will fail, some will be moderately successful, and a few will grow so large that they become publicly traded. The S&P 500 index represents the 500 largest companies by market capitalization in the U.S. While the S&P still includes 6 companies over 200 years old, it contains 137 formed within the last 35 years. Innovation, technology, and productivity never stop evolving, and the stock market rises as new companies leverage these advancements.
Risk/Reward Asymmetry
There is an asymmetrical risk/reward ratio built into the stock market that assures it goes up over time. The stock price of a failing company can go to zero, but no lower, capping downside risk. Berkshire Hathaway has a market capitalization of over $1 trillion. If it fails, investors can lose that staggering amount, but no more. However, winning stocks can go up almost indefinitely. Over the last 35 years, NVIDIA, Alphabet, Amazon, Meta, and Tesla have gone from $0 to a combined $12 trillion in value.
The market cleans out the losers: companies that are poorly managed, fraudulent, or outdated, through bankruptcy, acquisition, or being taken private. At the same time, the winners keep winning.
The Bottom Line
Human beings are far from perfect. Our history is filled with famine, cruelty, destruction, and war. Yet it’s also filled with innovation, hard work, resilience, and hope. We tend to sensationalize the problems of the present while downplaying the consistent progress and evolution from the past. 100 years ago, grueling child labor was common and accepted. My own mother lived most of her childhood without indoor plumbing. The median income earner in the U.S. lives objectively better and more comfortable lives than royalty in the Middle Ages.
In order to invest in stocks, you must, in some ways, be an optimist. You must believe that the future will be fundamentally better than the present, that parents want their children to have a better life than they do. You must believe in human innovation and hard work, and that, through technology, we will become more productive and prosperous without destroying ourselves in the process.
If you’re wrong, and the AI robots take over and kill us all, your investments won’t matter anyway.
That’s all for this lesson. Thanks for reading Business Is the Best Medicine. Stay tuned for Lesson Six, which will be published in two weeks, where we discuss financial advisors (and why you probably don’t need one). Let me know in the comments if you have any questions or concerns. And while you’re at it, subscribe to the blog so you don’t miss any future installments!