Soapbox: Opportunity cost applied to investment decisions. The best investments aren’t necessarily those with higher profits. The concept behind the opportunity cost is that by making the decision A, you will get the benefit X. However, if you decide for the plan B, you will reach the result Y, not getting the result X, that is what A could provide you. In daily basis, we are always making decisions which lead us to benefit from something and not getting another. For example: the central banks face the opportunity cost as rising inflation threatens economic growth. As a result, authorities are forced to raise the interest rate in order to prevent a inflationary process from occurring. However, there is a collateral effect which is slow down economic activity. Therefore, slower growth is the price or the opportunity cost of a higher interest rate. In the investment front, when somebody opts to put money into fixed income products, there is something at stake. Few people are willing to take risks in the stock markets, so for the most conservative investors trading stocks represents a high opportunity cost. They’d rather have a good night of sleep to exposing themselves to a high level of uncertainty and volatility. Unlike conservatives, speculators seek higher profits by taking huge risks. They are eager to profit by facing as much volatility as they can get. For this kind of investors, there is a huge opportunity cost in putting money into conservative investments, no matter how stressful it can be to speculate on uncertainty. Therefore, the best investments are not necessarily those that bring higher profits, but the ones that better match the needs and profiles of the clients. It is not worth sacrifing your health for something that you are not expected to handle very well. The same premise applies to speculators: you should not settle in if volatility is what makes you move forward.
Posted on: Wed, 11 Sep 2013 05:36:54 +0000
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