Time
What do you think are the important factors that should be considered by tertiary sector employees when they are deciding whether to place their superannuation contributions in the Defined Benefit Plan or the Investment Choice Plan? What issues relating to the concept of the time value of money, taxes etc., might be important in this decision-making process? Explain.
Too often corporate financial management documentaries concentrate on various crunching issues of investments. Usually, in practice, the numbers side of things is peripheral at best, probably of a lesser effect than the strategic problems of the investment decisions. Now, just like the activity-based cost, it is all too simple to concentrate on the monetary aspects to the exclusion of the non- financial factors (Gallery and Palm 2011). Therefore, to be a successful employee in all theses perhaps misleading factors and adopt the classification related to activity based cost, a new strand emerges: Time, Risks, Returns and consequently quality. This paper focuses or examines the assessment of financial decisions concerning two of the itemized strands above; that is Time and Risks.
The lead time to investment implementation is usually one of the variables to which the investment outcomes are most sensitive. In this context, the tertiary sector employees should of course estimate or calculate both the probability of delays as part of the risk management strategy and the financial effect as an integral part of the assessment of the sensitivity of the final returns (Brigham et al. 2016). There may exist the scope for varying the order in which the super fund is assessed or the amount of the superannuation contributions into the defined benefit plan. Either way, one must know all the investments opportunities available and be aware of their costs and long and long-term benefits. Various techniques like the critical path analysis are very essential for assisting an individual’s choices concerning the timing and the related value of the super fund.
These assessments and the techniques may be used to minimize the risks attached to a superannuation investment while quantifying the range or the extent of the increased involvement. The most familiar form of individual scheduling challenge, for the tertiary sector employees, is the job scheduling. Financial scholars and professionals are frequently involved in the identification of the most profitable investment choices (Chandra 2011). They are bound to appreciate and fully understand how monetary value fluctuates over time. The time value of money is, therefore an integral concept for the financial planners, accountants, business managers and consequently the employees to know because its utilization ore application will provide them a more transparent image of how to invest money and develop their companies (Gallery and Palm 2011). The time value is a significant aspect of finance, stating that the resources like for example, money existing at present may be worth more than the very same amount in the future. This is founded on the notion of potential earning capacity (Brealey et al. 2012). The fundamental aspect of this notion is that money can accrue and earn interest and increase in value over time, thus, it poses a more significant profit in the present. Some professionals also argue that it is financially beneficial for an individual to have a certain amount of money and spend it the very same time, since things like inflation, devaluations or even the stock market crash may reduce the purchasing power of the same amount in the future. Time value aspects apply to all segments of financial management and can probably be consulted during the determination of capital budgeting techniques, bond and stock valuation, leaning, financial vehicle analysis, investments and cost of capital (Black and Kirkwood 2010). Time and again the need for investment decisions is to attain the long-term goals of either the firm or the workers, preserving a share of a specific market and to maintain leadership in some economic activity.
How Time affects Return and Risks
In many occasions or situations, professionals like for example the accountants; use the time value of money when undertaking some critical investments choices and even the budgeting decisions. In times of enormous share market volatility, it may seem inappropriate for an employee to put his or her superannuation contributions in the minimal risk options to try to reduce loses over the short term. However, such reactions to short-term possibilities may significantly decrease the employees’ super fund balance over the long term (Zhang and Zhu 2009). Therefore, when monitoring any investment performance, it is essential to take into consideration that switching between options from time to time may not yield more returns in the long run. Similarly, before changing your investment choices and options or how you invest your superannuation contributions, it is critical for a person to ensure that he or she fully comprehend the range of investment options available, the time frame allocation for that particular investment and subsequently the ultimate impact of changing the investment option.
Time is the very fundamental role player when it comes to investments. Usually, as a standard rule, it can be said that it is your time in the market, but not your timing of the market. With that said the most significant opportunities to maximize the potential resources to achieve superior long-term returns lies in the aforementioned fact. For instance, when an employee or an individual invests his or her superannuation contributions in a defined benefit plan, he or she is making a long-term investment (Aebi and Schmid 2012). This denotes that the short-term decline in the value of their investments may not have a significant effect on the balance over time-based upon the investment period frame. However, one still needs to reflect on his or her interest in the risks and the time frame he would expect the superannuation to take. Generally, the longer a person’s investment horizon, the smaller the effect that risk or otherwise the market volatility may have on that persons’ ultimate superannuation balance and the more time he or she may want to put out the variability of returns or profits in the short term. On the contrast, if a person expects to accrue high level of returns in the end, then, he or she must accept the fact that high levels of risks must be involved (Nijskens and Wagner 2011). That is why it is very appropriate for any employee or any person to understand or have the full insight of the level of their risks profile before putting their money into any investment choice plan.
Risks
Having a better understanding of the aspects of risks and return and the way they are probably influenced by time is taken to be one of the most vital issues of making good use of your superannuation. Risks and return are considered as the integral role players in how much money or benefits an employee will seemingly pose when he or she retires, or the amount of pension income one can draw (McNeil and Embrechts 2015). Therefore, understanding how they operate and the perspective or your approach toward the risks can help you make very critical decisions regarding the investments that best meet your financial demands and goals. The focus on the returns frequently arouses the concerns and evaluation about of the risks attached to every investment opportunity. Either way, the investment or the managerial decisions require the necessary facts about the risks and the projected returns to be available. Risk evaluation should, at the very least, include an assessment of the probability and outcomes of the ideal and worst scenarios (Brigham and Houston 2012). Ideally, this may incorporate the likelihood distribution of all the possible results, such that realistic and logical considerations can be established on that particular risk or return compromise. Now, where the risks projected can be seen to be normally distributed; then, the risks background or profile of the investment position or decisions may be likely to have both the positive-negative outcomes. It can be noted that projections of cash flows are only considered to be estimates, such that the possibilities attached to such views can only be seen as figments of the imagination (Christoffersen 2012). However, if we can pose facts or evidence to suggest that one result or outcome is having a higher probability than another, then that can be remarkable, and potentially relevant, information that can be included into the analysis of the investments (Hull 2012). For the alternative outcomes, the probability estimates can be combined through decision making to indicate the distribution of possibilities. Investment risks are the possibilities that you may lose all your money resources on the investment of your choice or that your investment may not keep up with aspects of inflation.
According to financial professionals, all investments have got risks; however, the level of risks is dependent on the type of investment one has chosen. As already itemized above, the higher level of risks associated with an investment, the more potential to deliver you higher investment returns (Cumming 2009). For example, Leveraged oil ETFs are subjects to high volume trading activity, and they are well known for their high levels of volatility. Otherwise, they can prove or give the investors speedy and huge amounts or returns or losses depending on how these investors can make the trade out of it. The value of oil can be equivalently volatile, and therefore, making the trading activity to show or reflects an amplified level of volatility in its prices. At the point when individuals consider risks, it’s more often than not with a measure of anxiety (Black and Kirkwood 2010). We tend to connect risk with falling offer costs, all things considered; the risk is available in each one of the asset classes: money, settled premium, offers, and property.
An adjustment in the cost of an offer is only one type of risks, known as volatility. It is the degree to which the estimation of an investment climbs up and down after some time. Development assets, for example, shares and property, include higher instability than defensive ventures like money and fixed interest. On the plus side, this implies they’re likewise prone to give a higher return over the long term. Now and then (amid the GFC, for instance) we encounter the dark side of volatility, where anybody with an introduction to the share market – either straightforwardly or through their superannuation finance – is probably going to see their portfolio diminish in value (Hirsch et al. 2011). At the point when this happens, a typical result is to embrace a more cautious approach to deal with investments, with attention to protective resources. While this may lessen short-term tensions, over the more extended term it can cause considerably more tension since it might imply that you won’t wind up with enough cash to accomplish your money related objectives (Luke and Verreynne 2011). A significantly more sensible approach is to comprehend the connection amongst risks and return with the goal that you can decide the most appropriate blend of investments.
As an investor, it’s essential to consider to what extent you’re investing for. If you have time on your side, you might have the capacity to acknowledge the more volatility that runs with development investments keeping in mind the end goal to accomplish possibly higher returns over the long term. Distinctive asset classes perform better at various circumstances, so it’s conceivable to lessen volatility (and still pick up the general outcome you’re after) by spreading your cash over, and inside, the diverse asset classes (Gallery et al. 2011). This is known as diversification, or just not putting all your investments tied up in one place. In case you’re alright with the level of risks and enhancement in your portfolio, the most imperative thing to do when markets fall isn’t to freeze (Gallery and Palm 2011). With investments moving in cycles, by and large, the most exceedingly bad time to offer is when markets are falling because you can miss the subsequent recovery.
Conclusion
In summary, the paper analyzes the two factors that should be considered when making your superannuation investments. The time value is a significant aspect of finance, stating that the resources like for example, money existing at present may be worth more than the very same amount in the future. Apparently, the longer a person’s investment horizon, the smaller the effect that risk or otherwise the market volatility may have on that persons’ ultimate superannuation balance and the more time he or she may want to put out the variability of returns or profits in the short term. Finally, Risk evaluation should, at the very least, include an assessment of the probability and outcomes of the ideal and worst scenarios.
References
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