Why does the stock market always rise in the long run?
To understand this, I turn to William Bernstein’s book, “The Four Pillars of Investing”. According to Bernstein, the Gordon equation is the irrevocable law in investing. Put simply, the total growth of a stock market is equal to the sum of the dividend yield and the dividend growth of the stock market.
The stock market is made up on individual companies whose shares are traded. Each year, each company makes a profit, and gives out a portion of their earnings to shareholders as dividends. The rest of the earnings is kept by the company, and used to further increase their earnings.
This article from www.mymoneyblog.com also provides a good explanation of the Gordon equation. However, it breaks up the growth of the market to three components, with the extra component being speculative growth. Speculative growth is random …