That is too strong of a condition. The economy doesn't need to grow for passive investing to work.
Even when the economy is flat, passive management works. As long as companies are economically productive, capitalism will hand over a chunk of the profits to the owners of the capital.
Of course, growth increases the size of that chunk year over year, but capitalism doesn't stop when growth stops.
Active investing is when you are looking to exceed this passive margin by timing your trades well. Active investing requires changes in productivity (such as growth).
Returns from stock investing come from increasing stock prices.
Stock prices increase when earnings of the company grow.
In other words: when the economy grows.
You can argue that Amazon and Apple and Google and Facebook etc. will grow earnings even if the overall economy is flat or shrinks but I don't see how that would apply to passive investing i.e. investing in S&P 500 i.e. investing in 500 largest US companies.
S&P 500 is U.S. economy and they all are sensitive to overall economic situation. If people have less money, they buy less stuff. Amazon makes less money, their stock goes down. Apple sells less iPhones, their stock goes down. All other companies make less money, they spend less on advertising, Google and Facebook make less money.
I don't see a scenario where overall U.S. (or world) economy declines and S&P 500 doesn't decline.
In fact, declining economy is an argument for active investing. Even when overall economy declines, among 6000 companies listed on stock market there will be some that will be growing and if you invest in them, you'll make money.
> Returns from stock investing come from increasing stock prices.
There are other ways to make returns. Return from stock comes mainly from increasing stock prices and from dividends. But fundamentally, it comes from profits.
> Stock prices increase when earnings of the company grow.
There are many reasons stock prices increase. But whether it does or doesn't isn't really relevant.
When a company makes a profit, either:
* the profit is reinvested, the value of the company grows and the stock price grows, making a return for the passive investor
* the profit is returned as dividends, making the passive investor a return as well.
No growth needed for the individual companies either. As long as they are profitable, they make a steady return for the passive investor.
Thought experiment: imagine a company which is going to make 1 dollar of profit per year for all eternity, which it returns as dividends. For an investor with a discount rate of 95%, that company is worth 20 dollars. Say he buys the company for 20 dollars. After 10 years, that company is still worth 20 dollars, as eternity is still eternity, but the passive investor owning the company has made 10 dollars from the company.
As you can see, the passive investor made a return, despite the company only being profitable, but not growing nor shrinking.
You will make a return on your investment when your investment makes a profit, that is capitalism. Whether the profit is increasing, decreasing, flat or going in circles does not really matter, as long as it is a profit and not a loss.
This is all correct, but missing the higher order. Most investors will not take out the dividends, but reinvest them. A few might sell, because they are in retirement. But assuming that the retired people make up a small part of investors, profit is reinvested. Further, people invest a percentage of their income for retirement. All that means that work income and dividends make the stock prices go up and retirement makes the stock prices go down. You could say that retired people consume and help companies make profit, but it is actually worse for stock prices than investment, because the consumption requires companies to sell products and services that come with cost.
Even when the economy is flat, passive management works. As long as companies are economically productive, capitalism will hand over a chunk of the profits to the owners of the capital.
Of course, growth increases the size of that chunk year over year, but capitalism doesn't stop when growth stops.
Active investing is when you are looking to exceed this passive margin by timing your trades well. Active investing requires changes in productivity (such as growth).