Are index funds a scam that will be flattened by sound money? (chart inside)
https://ift.tt/3F0rnS5
I recently had a thought that scared the sh*t out of me.
My thought went like this:
Imagine a world with a 100% certain sound money (let’s imagine sats), meaning the total supply of sats will never go up or down, as we already know.
In this world, people will produce things and everyone can become wealthier materially but not everyone can become wealthier nominally. This is because all sats in this world are simply reallocated from place to place and person to person.
Naturally, an amount of the sats will be allocated to investing in companies. Let’s say about 20% of the total sats are allocated to investing in companies at any given time. The number itself is unimportant, but the idea is very important.
In this world, individual stocks will certainly go up and down over time but the total pool of sats in stocks should theoretically remain relatively flat, because people will always use sats for buying things, saving, investing in other things like bonds and real estate, etc.
So, in this world, VTI would remain relatively flat. Right?
The only way for this VTI to go up would be for sats to flow from another pool of investments like bonds to stocks.
I imagine VTI would go up and down over time depending on how much people prefer bonds, real estate, etc. but the long-term expected return would be zero.
So why does our real world VTI go up? Is it really just a combination of increasing the M2 money supply and dollars flowing to stocks from other investment categories like bonds? This is a little concerning as someone who has never really questioned index funds.
Incidentally, if you look at this graph of the total stock market vs the m2 money supply since 1971, it’s pretty damn flat.
https://ift.tt/3t4In7h
We’re only up about 70% total and this could theoretically be money flowing from the bond pool to the stock pool since bond rates have been falling basically this whole time.
In this case, my theory stands.
Edit: Another way for VTI to go up in the perfect sound money world would be if people just became more interested in investing for a period of time. However this will likely be temporary and correct back to flatness like what we saw 1997-2001 (really the only big spike on the stocks vs m2 chart).
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