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My MIDSX lost 30% this year. That has me wondering where the 30% went. I think it's like the profit a casino takes in. But I can't figure out who that is. Money doesn't just go "poof" does it?
One way to look at this (admittedly simplistic) is that money is nothing but a way of keeping score, within a larger barter system. To apply this simplistic model, assume that there are no bank accounts, no mattresses stuffed with cash, just non-cash property (real estate, gold, companies [i.e. stock], IOUs [i.e. bonds], cars, etc.).
Now imagine that all the prices dropped by 50% overnight. Poof. Everything is"worth" half as much. So what? Nothing would have changed; your two shares of IBM (now priced at $90 instead of $180) would still get you a share of Apple (now priced at $180 instead of $360). Wealth has not evaporated.
But if you held IBM and it dropped while everything else held steady, your share of the whole pie would have diminished; everyone else's would have increased proportionately. If there were only those two shares of IBM and one share of Apple in the world, and the IBM was suddenly priced 50% less, then instead of holding 1/2 of the world's assets, you'd be holding 1/3, and the owner of the Apple shares would be holding 2/3 instead of 1/2. It's all relative.
The bottom line is that everyone else becomes a little richer. Same thing that happens when the dollar goes down. US dollar holders can buy a little less, and everyone else can buy a little more.
This is correct only id ALL prices drop 50%, but we know that stocks fall but the price of bread does not. If all stocks drop down 50% overnight, and you sell them, you will be able to buy 2 times less bread.
Andrei - thus my example of IBM dropping and Apple not. Then the one share of apple costs not 2x IBM but 4X, which is why those 2 shares of IBM are now worth 1/3 of the world's value, and the one share of Apple is worth 2/3. Obviously you cannot swap 1/3 of the world's assets for 2/3, straight up. But you can swap 1/3 of the world's assets (the two shares of IBM) for 1/3 of the world's assets (0.5 shares of Apple).
Same as your bread example. No error. The drop in the value of one item simply redistributes the wealth worldwide. And that's where the money goes.
Comments
Now imagine that all the prices dropped by 50% overnight. Poof. Everything is"worth" half as much. So what? Nothing would have changed; your two shares of IBM (now priced at $90 instead of $180) would still get you a share of Apple (now priced at $180 instead of $360). Wealth has not evaporated.
But if you held IBM and it dropped while everything else held steady, your share of the whole pie would have diminished; everyone else's would have increased proportionately. If there were only those two shares of IBM and one share of Apple in the world, and the IBM was suddenly priced 50% less, then instead of holding 1/2 of the world's assets, you'd be holding 1/3, and the owner of the Apple shares would be holding 2/3 instead of 1/2. It's all relative.
The bottom line is that everyone else becomes a little richer. Same thing that happens when the dollar goes down. US dollar holders can buy a little less, and everyone else can buy a little more.
Same as your bread example. No error. The drop in the value of one item simply redistributes the wealth worldwide. And that's where the money goes.