Trade The Journey

Trade The Journey

Opportunity Costs

There is a cost to everything we do whether there is a price tag attached to it or not. In fact with every decision we make, we give up the opportunity to do something else. This principle is a fact of life. It is what we use to assess the risk of  any major decision we have to make although we seldom think of things this way. We usually make a pros and cons list regarding the decision we are attempting to make. We gather the opinions of others and possibly research people who have made the same decision successfully in the past.

If we are shopping and see an item we like, we generally make the purchase unless we are price conscious. Before making the purchase we think of the different options available to us at  a cheaper price or maybe we consider the quality more important than the price. Whatever choice we made in spending, we forever gave up the right to spend that same dollar. Of course the dollar I am speaking of is a theoretical dollar because it no longer exist to earn a return or be saved for future spending.

For most, stocks are seen in the opposite light. And instead of a business being seen, a price is seen that fluctuates at each itch of public perception. The bull constantly looking to make his way toward the higher pastures and the bear seeking to make an appearance after hibernation.   Instead of taking the steps we do when we are making a major decision, we plunge into stock investment as if the money we risk does not deserve the same attention. Many of the models created that analyst use, factor in the risk factors of investing your money and what you could generally get without risking your money. These models are take into account that each stock moves in relation to the market.

I am trying to present some of the more complex equation and theories as concepts hoping that you research the terminology like Capital Asset Pricing Models for risking your money or “Capital” in the markets. Being able to balance your returns and risk is admirable but being able to gain a excess of return with the same risk consistently is extraordinarily.

When we do take the principle of “opportunity cost” to investing, we see that that the money we invest has the opportunity to earn a safe return through the US government. The US government offers treasury bills, notes, and bonds separated by names in duration. The idea is that these investments are practically safe unless the US government is unable to make payments to its debt holders. All around the world the United States has continued to be seen as the gold standard.

Every time we place our investments in a stock, option, future or any other speculative investment vehicle we forgo the opportunity to earn a safe return from investing in the US government. We speculate because we want to earn a higher return. How well we research and understand the market will allow us to increase our chances of earning a profit but can never guarantee it.

The question you have to ask. Is are you willing to forego a low but sure return on your investment? and if you are and you lose, will your cash flow needed to maintain your standard of life be affected?

Thoughts?

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