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a guide for investors,
a guide for you
The Time Value of Money
Value versus quantity
There is an important distinction between value and quantity.
Let's say you have a $1 USD bill.
quantity
PAST
PRESENT
FUTURE
time
value
PAST
PRESENT
FUTURE
The value, or the purchasing power of that $1 USD is subject to change
time
The quantity or units of dollars you have is and will forever be $1 USD
Why does value decrase?
Over time, monetary value fluctuates and typically decreases because of: inflation, economic policies, global factors, etc.
what does this mean?
As time progresses, the value of your money tends to diminish. To counteract this trend, it's essential to:
1) Spend your money in the moment (not recommended)
2) Invest your money
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Investments
There are several types of investments one can make, many of which fall under the category of 'financial securities.' Investing involves allocating your money into these "securities" with the expectation of generating future income or profit.
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This process often means 'exchanging' your ability to spend that money immediately in hopes of receiving your original investment back, along with additional returns in the future.
"Now that you have gained an understanding of personal finance, this section will introduce you to the basics of investment, along with key considerations that are important for your future financial endeavors!
Risk
It's important to note that virtually all investments carry some degree of risk. Generally, risk and potential returns are directly related: higher risk can lead to higher returns, but also to greater potential losses. Therefore, the more risk you are willing to accept, the greater the potential for both higher earnings and significant losses. Potential returns are measured in %.
Risk free return
The risk-free return is a theoretical concept describing a rate of return on an investment with zero perceived risk. Since risk is correlated with potential earnings, investments considered risk-free typically offer lower returns. Often, government bonds are seen as examples of such investments, given the government's authority to print money for repayment. However, it's important to note that excessive money printing can lead to devaluation of the currency.
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Your investment goal should ideally be to attain a rate of return that at least preserves the purchasing power of your money, taking into account factors like inflation and economic changes.
goals
managing expectations
Investing is not a get-rich-quick scheme for most people. Its a process that takes time, strategy and discipline. The typical return rate in the US stock market is around 10% per year.
Investments yielding below 7% may be considered overly conservative. Although returns at this level may not be maximized, they do keep risks relatively low.
A favorable equilibrium in investment returns is usually found in the 8% to 16% yearly range. This spectrum offers a nice blend of reasonable returns along with a degree of security and consistency.
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Consistently achieving and maintaining returns over 17% is quite demanding and frequently entails a level of capital risk that exceeds the comfort zone of many investors.
A useful metaphor
An investment portfolio can be thought of as a car. If the car is moving fast, it will reach its destination quicker, but there's a higher risk of crashing. Conversely, if the car travels at a moderate speed, it may not arrive as quickly, but it does so with a lower risk of getting into accidents.
As an investor, you can manage risks through two main strategies:
1) Choose investments that align with your risk tolerance. This means selecting securities that match the level of risk you are comfortable taking on.
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2) Diversify your investments across different, ideally unrelated, categories.
This approach reminds me of the saying, "Don't put all your eggs in one basket." Diversification helps spread risk and can mitigate the impact of poor performance in any single investment.
A general rule
Debt instruments, bonds, cash, CD's, bank accounts
Stocks, real estate, high income bonds, mutual funds
Options, futures, etc
risk level
Relatively low
Relatively high
*Note: High risk securities will not be covered in this website
Types of Investors
Depending on the level of risk you are willing to take, you will most likely fall into one of the following categories
Credits to investopedia.com
Your strategy to meet your objectives will depend on where you stand on this chart. The types of financial securities you invest in and your investment portfolio need to be adjusted to your category. While a more aggressive investor invests heavily in options or futures, a conservative investor has the majority of his portfolio invested in government bonds.
The Power of Compounding
Just as time can decrease the value of your money, it can become your ally.
Compound interest is a powerful concept that refers to the process of earning interest on both the initial investment and the accumulated interest from previous periods. In simpler terms, it's "interest on interest," and it can cause wealth to grow exponentially over time.
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We encourage you to experiment with this compound interest calculator using reasonable values. Discover the potential of your invested money!
Access the US Government's calculator
Access it for free here!
Input your expected interest rate, initial investment and time period.
Fixed Income (bonds)
Equity theory (stocks)
Equity application (stocks)
Real Estate