S&P is consistently beating inflation?
"TL;DR: Because stocks represent added value from corporate profits, and not the price the goods themselves are sold at. This is actually a very complicated subject.  But here's the simplest answer I can come up with.  Stocks are a commodity, just like milk, eggs, and bread.  The government only tracks certain commodities (consumables) as part of the Consumer Price Index (CPI).  These are generally commodities that the typical person will consume on a daily or weekly basis, or need to survive (food, rent, etc.).  These are present values. Stock prices, on the other hand, represent an educated guess (or bet) on a company's future performance.  If Apple has historically performed well, and analysts expect it to continue to perform, then investors will pay more for a stock that they feel will continue pay good dividends in the future.  Compound this with the fact that there is usually limited a supply of stock for a particular company (unless they issue more stock). If we go back to Apple as an example, they can raise their price they charge on an iPhone from $400 to $450 over the course of say a couple years.  Some of this may be due to higher wage costs, but efficiencies in the marketplace actually tend to drive down costs to produce goods, so they will probably actually turn a higher profit by raising their price, even if they have to pay higher wages (or possibly even if they don't raise their price!).  This, in economics, is termed value added. Finally, @Hart is absolutely correct in his comment about the stocks in the S&P 500 not being static.  Additionally, the S&P 500 is a hand picked set of ""winners"", if you will.  These are not run-of-the-mill penny stocks for companies that will be out of business in a week.  These are companies that Standard & Poor's Financial Services LLC thinks will perform well." "Inflation and stock returns are completely different things The CPI tracks the changes in the prices of a basket of goods a consumer might buy, the S&P 500 tracks the returns earned by investors in the equity of large companies.  The two are very different things, and not closely linked. Example: A world without inflation Consider a world in which there was no inflation.  Prices are fixed.  Should stocks return zero?  Certainly not.  Companies take raw materials and produce goods and services that have value greater than that of the raw materials.  They create new wealth.  This wealth becomes profit for the company, which then is passed on to the owners of the company (equityholders) either in the form of dividends or, more commonly, price increases. Example: A world with no inflation and no economic growth Note that I have not implied above that companies have to grow in order for returns to outperform inflation.  Total stock returns depend on the current and expected profit of the firm.  Firms can remain the same size and continually kick out profits.  Total returns will be positive in this environment even if there is no growth and no inflation.  If the firms pay the money out as dividends, investors get a cash flow.  If they retain these earnings, the value of the firm's equity increases.  Total returns take both types of income into account.  Technically the S&P 500 is not a total return index, but in our current legal and corporate culture environment, there is a preference for retaining profits rather than paying them out.  This causes price increases. Risk bearing In principle, if profit was assured, then investors would bid up stock prices so high that profit would have to compete with the risk-free rate, which often is close to inflation (like, right now).  However, profit is not assured.  Firm profit swings around over time and constitutes a significant source of risk.  We can think of the owners of the firm as being the bondholders and equityholders.  These assets are structured such that almost all the profit risk is born by equityholders.  We can therefore think of equityholders as being compensated for bearing the risk that would otherwise  be born by bondholders.  Because equityholders are bearing risk, stock prices must be low enough that stocks have a positive expected return (above the risk-free rate, which is presumably not significantly below inflation).  This is true for the same reason that insurance premiums are positive--people have to be compensated for bearing risk. See my answer to this question for a discussion of why risk means we should expect stock prices to increase indefinitely (even if inflation halts). The S&P is not a measure of firm size or value The S&P measures the return earned by investors, not the size of US companies.  True, if constituent companies grow and nothing else changes, the index goes up, but if a company shrinks a lot, it gets dropped out, rather than dragging the index down. By the way, please note that dollars ""put into"" equities are not stuck somewhere.  They are passed on to the seller, who then uses it to buy something (even if this is a new equity issuance and the seller is the firm itself).  The logic that growth of firms somehow sucks money out of usage is incorrect." "The U.S. economy has grown at just under 3% a year after inflation over the past 50 years. (Some of this occurred to ""private"" companies that are not listed on the stock market, or before they were listed.) The stock market returns averaged 7.14% a year, ""gross,"" but when you subtract the 4.67% inflation, the ""net"" number is 2.47% a year. That gain corresponds closely to the ""just under 3% a year"" GDP growth during that time."
It depends what you mean by 'gain'. Over long period of times the market increases so using a blind monkey with a dart or index fund should be sufficient to get an average returns. The key difference is that changes in currency are close to zero sum game while money in equity or bonds is actually used for something (building a company etc.). If you mean 'get above average returns' then you will likely get answers depending on person. If you think that markets are efficient then you won't beat the market consistently - over long periods the returns are likely to be no better then average - because of large number of 'smart people' trying to beat each other (and even them are likely to have below-average returns). If you don't think so then it is possible to get above average consistently - as long as you know how to beat those 'smart people'. "There was a time when everyone felt their goal was to beat the respective index they followed. But of course, in aggregate, that's a mathematical impossibility. The result was that the average say large cap fund, whose benchmark index would be the S&P, would lag on average by 1-2%.  A trend toward ETFs that would match the market had begun, and the current ETFs that follow the S&P are sub .1% expense.  For the fact that studies (Google ""Dalbar"" for examples) show the typical investor lags not by 1% or 2%, but by far more for reasons of bad timing, my own statement that ""I've gotten a return these past years of .06% less than the S&P"" would have been seen many years ago as failure, now it's bragging. It handily beats the typical investor and yet, can be had by anyone wishing to stay the course, keep the ETF very long term." Interesting to me.  Index funds are known for hurting active management. Fund flows have been toward index funds, not active funds.  But apparently S&amp;P and MSCI are making hundreds of millions just by licensing out the names of their most popular funds.  Vanguard also had a sweetheart deal at one time:  &gt; Index funds weren't always a big business, and S&amp;P didn't always know just how valuable the indexes it owned really were. Before the first ETF ever hit the market, S&amp;P agreed to a perpetual license with Vanguard that entitled the index owner to a maximum annual fee of $50,000 from Vanguard's premier index mutual fund, the Vanguard 500 Index Fund.  &gt;As Vanguard popularized the index fund, S&amp;P began to realize just how much it had left on the table. By 2001, the Vanguard fund had $90 billion in assets  &gt; To this day, Vanguard's premier S&amp;P 500 index fund is reportedly operating under its perpetual license, paying just $50,000 per year to S&amp;P Global, but subsequent funds based on S&amp;P's indexes are likely paying full freight. For S&amp;P, it was a very costly lesson to learn. One reason it matters whether or not you're beating the S&P 500 (or the Wilshire 5000, or whatever benchmark you choose to use) is to determine whether or not you'd be better off investing in an index fund (or some other investment vehicle) instead of pursuing whatever your current investment strategy happens to be.  Even if your investment strategy makes money, earning what the S&P 500 has averaged over multiple decades (around 10%) with an index fund means a lot more money than a 5% return with an actively managed portfolio (especially when you consider factors like compound interest and inflation). I use the S&P 500 as one of my criteria for judging how well (or poorly) my financial adviser is doing for me. If his recommendations (or trading activity on my behalf, if authorized) are inferior to the S&P 500, for too long, then I have a basis to discontinue the relationship. Check out this Wikipedia entry on stock market indices. There are legitimate criticisms, but on the whole I think they are useful. As an aside, the reason I point to index funds specifically is that they are the one of the lowest-cost, fire-and-forget investment strategies around.  If you compare the return of the S&P 500 index over multiple decades with most actively managed mutual funds, the S&P 500 index comes out ahead. &gt; “The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent, he said.”  [Warren Buffett](https://www.csmonitor.com/Business/The-Simple-Dollar/2013/0506/What-Warren-Buffett-s-stock-market-math-means-for-your-retirement)  This isn't the whole picture, but it's a start. "Article summation: You may have enjoyed that 30% last year and 6% first half this year, but inflation is almost at 2% and we expect inflationary hedges and non-US-dollar investments to outperform.  My response: Hahaha, what? Is he even looking at his own numbers? Since when did 2% inflation ""trump"" 6, 12, or 30% growth? He can't seriously be implying that people should run to gold..." Warren Buffet and Berkshire Hathaway took a 50% loss in each of the last two bear markets. His stock even lost 10% in 2015 when the S&P lost 8%. He doesn't have a track record to support the claim that his stock performs relatively better in a bear market, so perhaps it's best to take his letter with a grain of salt. Edit: As one commenter points out, Mr. Buffett is comparing the book performance of his fund to the market performance of an index. That is an apples to oranges comparison. It's deceptive at best. This doesn't really make sense, as the small cap indices have a similar rate of growth as the s&amp;p 500. The global scale has some relevance, but exports are included in GDP as well, so it's not the full story.  A better answer, as is noted in comments lower down, is that the S&amp;P does not **grow** at 6%. It *returns* 6% per year. The dividend yield of the s&amp;p is a bit over 2%. Dividends are not growth, they are simply income; they may also grow themselves, but rarely by 6% per year (in real terms). Additional income that's not paid out in dividends probably amounts to another 1-2%. Growth is the final 1-3%, which makes it roughly match GDP.