Ask the Fool: Time Value for Money
Q: What does the time value of money refer to? Ja, Clinton, New York
A: It is a concept from the business world that the dollar today is more valuable than the dollar in the future. This is partly because inflation erodes purchasing power over time, and partly because investing a dollar today can increase its value in the future. (Test the concept for yourself: Would you rather have a dollar today or a dollar in five years?)
Stock analysts and business school students incorporate the time value of money when performing complex discounted cash flow (DCF) analyzes to arrive at an estimate of the intrinsic value of a company or stock. (There are also simpler ways to estimate a company’s value, using metrics such as price-to-earnings (P/E) or price-to-sales ratio.)
DCF discounted cash flow analysis features estimates of how much cash a company will produce over time, discounting future earnings at a “discount rate” which is essentially the rate of return that investors expect.
Q: I am considering moving after retirement. Where can I look up the cost of living in different cities? – CL, Phoenix
A: Try clicking on Numbeo.com/cost-of-living – it saves cost of living in many cities and countries. It offers some detailed category rankings, and you can compare sites. For example, it recently showed rental and grocery prices in Atlanta 12.6% and 7.8% lower, respectively, than those in Denver.
A little searching online could turn up more cost of living calculators — some of which include healthcare data, which is important for many people, especially those of retirement age or on the verge of retirement. MyMove.com/cost-of-living provides specific examples of health care costs in US cities.
Fool’s School: When to be afraid or greedy
Superinvestor Warren Buffett has recommended simple, low-fee index funds — such as those that track the S&P 500 Index — to most investors. The beauty of these funds is that you can keep adding money to them over time, no matter what the market does, and you’ll get roughly the same index return (lower fees). Many investors prefer to invest some or a large portion of their money in individual stocks. This takes a lot more work, and it’s not always easy – especially in times like these.
The stock market has fallen sharply over the past few months, with the S&P 500 index recently dropping more than 18% since the beginning of the year. Quite a few previously high-flying stocks (the kind that attract a lot of investors) have fallen 50% – and some are down by much more. This can easily alarm investors, and the bear market reflects many of them frantic selling.
Some of these investors may sell because they no longer believe in their investment, and that’s okay. But others are selling in a panic just because their peers are selling. This is generally the wrong thing to do in a heavy market sell-off – because that’s when big stocks are up for sale more often.
Buffett also advised investors that if they “insist on trying to time their participation in (stocks), they should try to be afraid when others are greedy and only greedy when others are afraid.” In other words, if everyone is buying and the market is going up, tread carefully, because many stocks will be very expensive. And when the market drops sharply, this is the time to go shopping. Buffett’s advice is basically another way of saying “buy low, sell high” – the main way to make money from stocks.
Obvious market volatility like the one we’ve seen lately can be stressful and even frightening. You can reduce your stress by reading more about investing and understanding that the market will always be volatile. Remember, too, that every crash is followed by a recovery.
My dumbest investment: a neglected portfolio
Back when oil crashed in 2016, I invested in several oil company stocks near their lows and enjoyed amazing initial returns. I was somewhat in love with them, so I stuck. (I didn’t diversify well either.)
I’ve stuck with my mom’s death, a bad breakup, and an international assignment in Asia — all without paying much attention to stocks. Neglecting my portfolio turned my large returns on investments in a timely manner into huge losses.
When I couldn’t keep track of my stocks, I had to bundle everything into cheap index funds so I could manage my portfolio effectively again. I am not saying that you need to monitor the markets every day and trade frequently, but you should be on top of your investments enough so that you can adjust your strategy if necessary. If something happens where you have to stay put for a while, it is better to either diversify well into safe companies or move to index funds. Obviously not diversifying was my other big mistake. – AN, online
The scammer replies: We can’t add much to the problems you noticed and the solutions you suggested. Low-fee index funds like the SPDR S&P 500 ETF (index symbol: SPY) will serve most of us very well, and require very little attention.
Note that there are no “safe” businesses – but established, healthy and growing businesses with strong track records in the defense industries require less attention than other businesses.
– Distributed by Guild Andrews McMeel