Is the very long-term growth of the stock market bound by aggregate net income?
I am a believer in that theory. My opinion is that over the long term, we can expect 25% of income to reflect the payment on one's mortgage, and if you drew a line over time reflecting the mortgage this represents plus the downpayment, you'd be very close to a median home price. The bubble that occurred was real, but not as dramatic as Schiller's chart implies. $1000 will support a $124K 30yr mortgage, but $209K at 4%. This is with no hype, and exact same supply/demand pressures.  The market cap of all US companies adds to about $18T. The total wealth in the US, about $60T. Of course US stocks aren't just held by US citizens, it's a big world.  Let me suggest two things - the world is poor in comparison to much of the US. A $100,000 net worth puts you in the top 8% in the world. The implication of this is that as the poorer 90% work their way up from poverty, money will seek investments, and there's room for growth.  Even if you looked at a closed system, the US only, the limit, absent bubbles, would be one that would have to put a cap on productivity. In today's dollars we produce more than we did years ago, and less than we will in the future. We invent new things faster than the old ones are obsoleted. So any prognostication that our $18T market can grow to say, $30T, does not need to discuss P/Es or bubbles, but rather the creation of new products and businesses that will increase the total market.  To summarize -  Population growth (not really discussed), Productivity, and long term reduced Poverty will all keep that boundary to be a growing number.  That said, this question may be economic, and not PF, in which case my analysis is bound for the Off-Topic barrel. Fascinating question.
Your question is actually quite broad, so will try to split it into it's key parts: Yes, standard bank ISAs pay very poor rates of interest at the moment. They are however basically risk free and should track inflation.  Any investment in the 6-7% return range at the moment will be linked to stock. Stock always carries large risks (~50% swings in capital are pretty standard in the short run. In the long run it generally beats every other asset class by miles). If you can’t handle those types of short terms swings, you shouldn’t get involved. If you do want to invest in stock, there is a hefty ignorance tax waiting at every corner in terms of how brokers construct their fees. In a nutshell, there is a different best value broker in the UK for virtually every band of capital, and they make their money through people signing up when they are in range x, and not moving their money when they reach band y; or just having a large marketing budget and screwing you from the start (Nutmeg at ~1% a year is def in this category). There isn't much of an obvious way around this if you are adamant you don't want to learn about it - the way the market is constructed is just a total predatory minefield for the complete novice. There are middle ground style investments between the two extremes you are looking at: bonds, bond funds and mixes of bonds and small amounts of stock (such as the Vanguard income or Conservative Growth funds outlined here), can return more than savings accounts with less risk than stocks, but again its a very diverse field that's hard to give specific advice about without knowing more about what your risk tolerance, timelines and aims are. If you do go down this (or the pure stock fund) route, it will need to be purchased via a broker in an ISA wrapper. The broker charges a platform fee, the fund charges a fund fee. In both cases you want these as low as possible. The Telegraph has a good heat map for the best value ISA platform providers by capital range here. Fund fees are always in the key investor document (KIID), under 'ongoing charges'. "If you're talking about a single stock, you greatly underestimate the chances of it dropping, even long-term. Check out the 12 companies that made up the first Dow Jones Industrial Average in 1896. There is probably only one you've heard of: GE. Many of the others are long gone or have since been bought up by larger companies. And remember these were 12 companies that were deemed to be the most representative of the stock market around the turn of the 20th century. Now, if you're talking about funds that hold many stocks (up to thousands), then your question is a little different. Over the long-term (25+ years), we have never experienced a period where the overall market lost value. Of course, as you recognize, the psychology of investors is a very important factor. If the stock market loses half of its value in a year (as it has done a few times), people will be inundated with bad news and proclamations of ""this time it's different!"" and explanations of why the stock market will never recover. Perhaps this may be true some day, but it never has been thus far. So based on all the evidence we have, if you hold a well-diversified fund, the chances of it going down long-term (again, meaning 25+ years) are basically zero." There's a few things going on here. If we fixed rates (and terms) over time we'd expect a pretty tight chart of home prices to income, almost lockstep. Add a layer of growth above that in boom times due to the wealth effect (when stocks are way up, we have extra money to blow on bigger houses) and the opposite when markets are down. Next, the effect of rates. With long term rates dropping from 14% in 1985 to 5% in 2003, the amount that can be bought for the same monthly payment rises dramatically as rates fall. Easy to lose site of that and the fact that the average size house has increased about 1.5% per year over the last 40 years, surely that can't continue.  When you normalize all these factors, houses cost fewer hours-worked almost at the peak of the market than 25 years ago. Mike's logical example of extrapolating out is very clever, I like it. In the short term, we'll see periods that are booms and busts, but actual prices will straddle the line representing the borrowing power of a week's pay. The idea of a stockmarket is multiple people betting on the value of an asset and then getting paid the difference between their bet and the real value of the asset.  The goal being to keep the value of the stock as accurate as possible so capital is allocated to companies that will use it most efficiently.  The reward for people making these bets is a portion of that capital.    What you are suggesting is just a graph of the average happiness.  The difficult part of turning this into a market, is being able to assign value to happiness, value that you can gain or lose by choice.      Ironically, money is a indicator of happiness.  When apple came out with the iPhone, people saw it and decided it would make them happier if they owned it creating demand.  Investors noticed that people believed owning an iphone would make them happier so they bid up the price of AAPL stock.  People are happier with their iPhones and investors benefitted from this happiness and got cash allowing them to spend money on things to increase their happiness.    In order to extract happiness from the stock market a lot of other things come into play.  A biotech company curing cancer would be a solution to something that drastically decreases happiness.  Increasing alcohol sales might be a result of people trying to offset the sadness in the short term but in the long term it is a depressant and doesn't make you happy.  An individual might be happier with an extra $10B but overall 1 million people getting $10k each would increase average happiness much more.  But somebody like buffet can invest in companies that can generate way more happiness than just handing out cash.    The happiness report is an annual report of happiness.  Looking at these results next to the Gini coefficient (income inequality), and industry growth by country might start to give you an idea of what affects happiness.  For instance in Africa income inequality could sky rocket while the stock market plummets and happiness could still increase because of public health investments made years ago, causing the infant mortality rate to plummet.  If you want to think about this topic I recommend reading the great escape by Angus Deaton. The stock market is generally a long term investment platform.  The share prices reflect more the companies potential to be profitable in the future rather than its actual value.  Companies that have good potential can over perform their actual value.  We saw this regularly  in the early days of the internet prior to the .com bust.  Companies would go up exponentially based on their idea's and potential.  Investors learned from that and are demanding more these days.  As a result companies that do not show growth potential go down. Companies that show growth and potential (apple and google for 2 easy examples) continue to go up.   Many companies have specific days where employees can buy and sell stocks.  there are minor ripples in the market on these days as the demand and supply are temporarily altered by a large segment of the owner base making trades.  For this reason some companies have a closed pool that is only open to inside trades that then executes the orders over time so that the effect is minimized on the actual stock price.  This is not happening with face book.  Instead many of the investors are dumping their stock directly into the market.  These are savvy investors and if there was potential for profit remaining you would not see the full scale exodus from the stock.  The fact that it is visible is scaring off investors itself.  I can not think of another instance that has gone like facebook, especially one that was called so accurately by many industry pundits. "One of the best answers to this question that I've ever read is in a paper published by Robert Lucas in the Journal of Economic Perspectives. That journal is meant to a be a place for experts to write about their area of expertise (in economics) for a general but still technically-minded audience. They recently opened up the journal as free to the public, which is a fantastic resource -- you no longer need a subscription to JSTOR (or whatever) to read it.  You can read the abstract to the paper, and find a link to it, here. One of the things that I like a lot about this paper is that it strips out absolutely everything even slightly unnecessary to thinking about a macroeconomy, and just discusses what one can arrive at with a very very simple model. Of course, with great simplicity come sacrifice about details. However, it does a great job of answering your question, ""why do people care about growth?"" A quick note: the key to understanding the answer to your question is to think about things in terms of ""the long term""  -- not even looking forward to the future, because we'll be dead by then, but looking back to the past. The key to the importance of growth is that, for the last ~200 years, the US has, on average, had maybe 2-3% ""real growth"" per year (I'm pulling these numbers out of my head; I think much better numbers are in that paper somewhere). On average, over that period of time, this growth has meant that the quality of life that one has, if one lives in a country experiencing this growth, is enormous compared to countries that do not experience this average growth over that period.  Statistically speaking, growth is also somewhat auto-correlated. Roughly speaking, if it was low the last few periods, you can expect it to be low the next period. Same thing if it's high.   Then, the reason we care about growth right now: if you have too many periods of low growth, pretty soon the average ""over the long term"" growth will be pulled down -- and then quality of life can't be higher in the future (which quickly becomes someone's ""present""). The paper above makes this point with a very simple model. Of course, none of this touches on distributional issues, which are another issue entirely. With respect to, ""The economy needs to grow to just keep up with its debt repayments,"" I think the answer is along the lines of, ""sometimes countries get into debt expecting that growth will increase their resources in the future, and thus they can pay back their debt."" That strategy is, of course, the strategy that anyone borrowing (""taking out a loan"") should be employing -- you should expect that your future income will be enough to pay back your interest+principle on a loan you took. Otherwise you're irresponsible. At the aggregate level, production is the nation's ""income"" -- it is what you have, all that you have (as a nation) to pay back any debt you've incurred at the national level." Correct, kept orange demand in a microcosm to simplify.  In the example, ~1 or 2 people would have been highly paid to build the machine, and the house would have created temp jobs for 2 or 3, or the money would have flowed to another tree owner and put into a bigger house.  Point is the new inflow of money hasnt cycled through the economy fast enough to have an effect on consumptive demand. New money has a slower velocity with net effect on inflating asset prices up. "Are you talking long-term institutional or retail investors? Long-term *retail* investors look for *orderly markets*, the antithesis of HFT business models, which have a direct correlation between market volatility and profits. To a lesser extent, some ""dumb money""/""muppet"" institutionals do as well. HFT firms tout they supply liquidity into markets, when in fact the opposite is true.  Yes, HFTs supply liquidity, *but only when the liquidity's benefits runs in their direction*. That is, they are applying the part of the liquidity definition that mentions ""high trading activity"", and conveniently ignoring the part that simultaneously requires ""*easily* buying *or* selling an asset"".  If HFT's are the new exchange floor, then they need to be formalized as such, *and become bound to market maker responsibilities*. If they are actually supplying liquidity, like real Designated Market Makers in the NYSE for example, they become responsible to supply a specified liquidity for specified ticker symbols in exchange for their informational advantage on those tickers. The indisputable fact is that HFT cannot exist at their current profit levels without the information advantage they gain with preferential access to tick-by-tick data unavailable to investors who cannot afford the exchange fees ($1M per exchange 10 years ago, more now). Restrict the entire market, including HFTs, to only second-by-second price data without the tick-by-tick depth, and they won't do so well.  Don't get me wrong, I'm not knocking HFTs *per se*; I think they are a marvelous development, so long as they really do ""supply liquidity"". Right now, they aren't doing so, and especially in an orderly manner. If you want retail investors to keep out of the water as they are doing now, by all means let HFT (and regulatory capture, and a whole host of other financial service industry ills) run as they are. There are arguments to be made about ""only let the professionals play the market"", where there is no role for retail and anyone who doesn't know how to play the long-term investment game needs to get out of the kitchen. But if you are making such an argument, come out and say so."