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Investment and the Time Value of Money
Time value is usually an expression used in options trading. When an options contract has a while to run before expiration it is said to have time value. Anything can happen so the price of the options contract may well rise or fall. Here we are concerned about investment and the time value of money. Specifically, we are concerned about inflation and the devaluation of currency. However, investment and the time value of money may also relate to a monetary crisis and deflation in which cash becomes king because it is so scarce. As regards investment and the time value of money, consider how money managers commonly seek to keep up with inflation and make a percent or two more as a conservative goal. Reasonable financial advice for the rest of us is also to pick investment vehicles and specific investments that will reliably keep ahead of inflation.
Picking Investments with Inflation in Mind
A standard means of evaluating an investment is to look at intrinsic value, especially when investing in stocks. Intrinsic stock value is the actual value of a company or stock based on the sum of future income, based on fundamental analysis, and discounted to current value. In determining intrinsic value investors use treasury bills as a benchmark as the prevailing interest rate is tied to expectations of inflation. Thus, when considering investment and the value of money, the expected rate of inflation is paramount. An investment may be growing rapidly, but if inflation is eating away at the purchasing power of the local currency, it may really be losing money over time. In our article about Three Good Offshore Investment Ideas, we look at investment opportunities in growing economies and in economies in which the currency is outperforming the US dollar, Euro, and Yen.
Growth, Stagnation, and Speculation
Microsoft was a hot stock for years. The stock value multiplied about two thousand fold from when it was first issued until the stock peaked. Now Microsoft is a huge corporation with a very secure future. However, it is essentially done growing. Considering investment and the time value of money, Microsoft is sort of like putting money in a savings account at less than a percent a year interest. The money will not go away rapidly but the purchasing power of what you have will dwindle year by year. A common means of measuring the strength of a currency is to note its buying power of a mixed basket of commodities. How much gasoline or bread can a dollar buy? How much gold and how many cars can you purchase with the Yen? The standard argument for gold, during a bull market, is that gold holds it value. However, gold is a commodity that is prone to speculation. Currently it may be time to sell gold as it seems set to fall.