Question

Why does money have a time value? Does inflation have anything to do with making a dollar today worth more than a dollar tomorrow? What happens to the value of your money if there is more than anticipated amount of inflation during your investment period? Approximately what is the US's inflation rate normally and do think it will be higher or lower this year? Do you think it is wise to invest money right now with all the uncertainty? What do you believe are good industries/firms to invest in during this pandemic? Each person's lives and risk levels are different.

If you were given $10,000 today, would you

a.) but it in a savings account b.) invest it in high risk/high yield stocks c.) invest in stable bonds/dividends d.) use it to pay bills

or a combination of a couple of the choices? Would you have made a different choice if we weren't in the middle of a pandemic?

Answer 1

Time value of money is the principle which states that the worth of money today is more than the worth money tomorrow. It is because of the fact that the money you have currently can be put to many uses which will be profitable for the person having the money. The same is the case with the investors. The investors also want their money today so that they can put the earned money to other investment avenues and earn more interest.

There are three basic reasons which clears why is the time value attatched to the money:

1. The money can be invested and interest can be earned on the invested money which gives the investor more spending power.

2. Because of Inflation, the value of money decreases if kept for long time.

3. There is always a risk of not receiving the money attatched with the money. So, the investor wants their money as soon as it is earned.

Inflation is the decrease in the value of moey over time. This decreases the purchasing power of the money. Inflation increases the price of the product decreasing the number of goods you can purchase with the same amount of money. For eg. In the year 2010, a product was priced at Rs. 100 but after 5 years the inflation rate increased to 2% causing the price of the product to be Rs. 102. Earlier the product can be purchased with Rs. 100 now you have to cut down your savings by Rs. 2 to buy the same product. If the wages of the employees are kept same, then there will be reduction in their purchasing power and they will be able to save less. So, people will want their money as soon as it is earned to invest that amount somewhere and earn interest, so that their purchasing power will be less impacted with the increasing inflation.

Inflation also affects the investment returns over time. The actual inflation rate may differ from the one that was calculated at the time of investment. If the actual inflation rate is higher than the anticipated inflation rate, this will have a negative impact on the returns received by the investor. But if the real inflation rate is lower than the anticipated inflation rate, it will have a positive impact on the returns of the investor. So, the inflation have a great impact on the returns of the investments and results in disturbing the returns of the investors which affects their purchasing power and standard of living.

In the U.S, during this year the inflation rates were declining till July, but from August the inflation rates started rising slightly and more slightly in September. The food and energy index also increases from August and Suptember. During this pandemic, the energy and food consumption increased which resulted in increase in inflation rates and these rates are expected to increase as soon as the situation normalises. The rates will sharply increase as the sellers will want to cover up for the amount they have sacrificed during the time.

Investing is an on going phenomenon, whatever the situation is it can be of great benefits and also be of great loss. There is always uncertainity in the market. Because of this uncertain situations, the investors will take their money out and sell the securities held by them. The excessive selling of the stocks will lead to decline in the value of stock and one can buy the stock for a relatively lower price. This will reduce the amount of loss that one will suffer in the long run. The profits can also be higher if the stock is kept for longer time frame.

In this pandemic situation, the companies which earned huge profits are the pharmaceutical indutries and the medical sectors. Also the chemical industries earned big. The online payment companies available are also a big gainers. The business of these sector companies earned big and the shareholders also earned big. This situation is going to continue for some period. So, investing in these stocks for short period can give higher profits.

if i were given $10,000 today, I would invest some part in high risk/ high yield stock and the other part to pay the bills. Investing in high risk/ high yield stocks will give me more purchasing and spending power and paying the bills will decrease my liability.

If not for this pandemic, I would have invested in long position stocks and kept the security for longer time period. But because of this pandemic situation going on, it will not be suitable to keep the invetment in same stock for longer time period. Investing for shorter time period and geeting the money and investing in other stocks for short time can giver higher returns.