Fundamental Analysis for Beginners: Grow Your Investment Portfolio Like A Pro Using Financial Statements and Ratios of Any Business... A.Z Penn
Examples of Time Value of Money
Here's a hypothetical example to show how the time value of money works. Let's assume a sum of $10,000 is invested for one year at 10% interest compounded annually. The future value of that money is:
The formula can also be rearranged to find the value of the future sum in present-day dollars. For example, the present-day dollar amount compounded annually at 7% interest that would be worth $5,000 one year from today is:
Would you rather have me give you a dollar today, or a dollar in five years?
A dollar today isn’t worth a dollar in 5 years because of inflation.
Compounding is usually done monthly for some funds, quarterly for stocks and stock funds, and semi-annually for bonds like treasuries and corporates and munis. A Treasury Bill pays it’s yield at maturity, as do most CDs. If you’re doing compounding calculations you have to take the different pay schedules into account.
Rule of 72- Years to double= 72/ Expected rate of return = 72/10% =7.2
I think it’s useful to demonstrate the danger of inflation. With inflation at 8%, how long does it take to lose half your money?
X = 72/8 = 9 Years! With inflation at a more normal and moderate 3% x= 72/3 = 24 Years.
Tools for Finding Company Names / Potential Investments
Stock Picking Considerations
OBJECTIVE: If building a portfolio of stocks we’re hoping to identify opportunities and weight them in a way that random selection (indexing) can’t. We do this primarily for two reasons: we believe we can do better than random selection, two, we can express our own convictions and interests and industry knowledge.
IDENTIFY TRENDS. We can try to predict the future, but it’s easier to spot and follow a trend currently in place.
TARGET GROWTH VS. VALUE. We can target small companies with more growth headroom or we can target large well-established companies with long track records. There is overlap between the two groups, they aren’t entirely distinct.
SOURCES OF IDEAS. ETF holdings, Mutual Fund Holdings, financial media, free or pay websites, own industry knowledge, own life experiences… to be appended…