Unveiling the "Time Value of Money" for Sharper Investment Strategies ??

If you were to win the first prize in the lottery, how would you allocate the money? In the past, it was common to observe wealthy individuals safeguarding extra funds by burying them in the ground. However, contemporary practices involve relying on banks as intermediaries or institutions for depositing substantial sums of money.

So, how does depositing money with a bank compare to keeping cash on hand? Are there alternative methods to enhance the value of lottery winnings in today's context?

Let's explore these questions together and seek potential strategies for optimizing newfound wealth. ??

? Understanding the Time Value of Money:

When you receive a substantial sum of money and choose to leave it untouched, the economic principle of the Time Value of Money comes into play. In this context, the value of the money diminishes over time due to the erosive impact of inflation, causing the purchasing power of the same amount to gradually decline. The Time Value of Money theory, central to finance, asserts that the present value of a given sum of money is greater than its future value.

?? How to Invest for Satisfactory Returns:

The value of money is subject to change, influenced by the opportunities available for investment. Individuals holding money today can leverage it to generate growth through investments. Conversely, those seeking to borrow money will incur higher repayment costs in the future, as borrowing today implies the opportunity to enhance the value of that money over time. Simply put, the choice between investing or holding money today manifests in future interest earned or interest paid.

Given this, where should you allocate your money to prevent depreciation? Let's explore some intriguing investment options categorized according to the level of risk you are willing to accept.

?? Investment Options Based on Your Risk Tolerance:

1. Invest at a Low-Risk Level ??:

For individuals lacking knowledge in investing or risk management, the most suitable investment avenue involves depositing money with a bank to earn interest. Despite offering an average interest rate of approximately 0.3% - 1.25% per year, the challenge lies in the fact that the average inflation rate in Thailand is around 3% per year. While depositing money in a bank generates better returns than keeping it idle, it still falls short of overcoming inflation.

2. Invest at a Low-Medium Risk Level ????:

Individuals with a foundational understanding of investing basics can explore investing in debt instruments, such as bonds or fixed-income instruments, which present a low to medium risk. By investing in bonds, one lends money to large companies seeking funds and receives periodic interest. However, risks may arise if the company faces liquidity issues or declares bankruptcy, leading to the inability to repay principal and interest. Factors to consider before purchasing bonds include opting for those with a credit rating of at least BBB-.

If the perceived risk in bonds seems high, another option for risk-averse individuals is to invest in government bonds. These debt instruments carry minimal or virtually no risk, as the government is considered a reliable borrower capable of repayment. Returns on government or state enterprise bonds typically range from 1.5% to 3%, depending on the duration and credit risk of the borrower. Higher credit risk can result in greater returns, adhering to the principle of "High Risk, High Return." Investing in bonds is generally regarded as a low-risk strategy that provides returns surpassing inflation to a certain extent.

3. Invest at a Medium-High Risk Level ????:

For those comfortable with moderate to high levels of investment risk, allocating funds to investment funds presents an interesting option. Investing in funds involves entrusting your money to a fund manager, eliminating the need for direct involvement in stock or debt instrument purchases. While this approach doesn't eradicate risks entirely, it allows individuals with knowledge and substantial capital to enter the market on your behalf.

However, it's important to note that investing in funds is not risk-free; the level of risk depends on the assets or industries in which the chosen funds invest. Economic downturns or periods of low profitability in the chosen sectors may impact returns. Typically, investing in funds is a long-term commitment, with investors having the opportunity to accumulate increased unit value (NAV) over time. The recommended time horizon for mutual fund investments is 10 years or more to achieve returns that effectively outpace inflation.

4. Invest at a High Level of Risk ??:

Those prepared to embrace higher levels of risk can opt for stock investments. Stocks are considered high-risk assets as market prices and risks associated with each stock vary. Additionally, daily price fluctuations are common during market hours. However, it's essential to recognize that investing in stocks doesn't uniformly entail high risks. Investors can choose less volatile stocks or opt for dividend-paying stocks to generate passive income. The choice depends on individual investment strategies and goals.

In summary, simply holding onto money may lead to missed opportunities and diminishing benefits. The Time Value of Money theory emphasizes that money today holds more value than money in the future due to increased investment opportunities.

Investment options range from low-risk choices such as depositing in a bank or purchasing government bonds to higher-risk endeavors like investing in stocks.

Before diving into any investment, thorough research is crucial to understanding associated risks and ensuring a secure and tranquil investment experience. There's no need to fret or lose sleep over potential missteps in your investment journey when well-informed decisions are made. ?