Have you ever owned something and wish you bought something else instead that made way more money? That's the cost of choosing one investment over the other. Opportunity cost is the return you miss out on when picking your stocks. This is something to not overlook when understanding your own investments. If you buy an investment worth $100, and it falls to $50 then you might regret buying. At the same time, a different investment could have brought your $100 to $125. Your opportunity cost was holding the poor investment instead of the good one. The problem comes if you decide to continue holding onto your bad investment just because you hope it will go back up. If you make a poor decision and lose some money, that's okay it happens. We all make poor investment decisions, but the important part comes what you decide to do with the investment afterwards. Many investors will look at that $50 they lost and continue to hold on to the investment until they might "break-even". This is an investing fallacy, not every investment is guaranteed to go back to the price you bought. The more important thing is WHY do you think your investment will go back up? If you're holding a broad index fund like $VFV or $XEQT then you might know that long-term the whole market will eventually recover and you can hold long-term. The same can't be said about many other funds or single stocks. If $NVDA were to crash 50% or more, there may or may not be a time where it recovers, that's totally unknown. The problem is many take on such a large opportunity cost because they hold investments all the way down until they've lost all their money. An important skill is to know when you've made a bad decision and move on from it. Even if your $100 went down to $50, it could still absolutely keep going down to $30 then $20 then $10. What might be a better choice is to take that $50 and put it towards something that will actually give you better returns. Remember, hope is not a strategy, the market does not care how you "feel" about an investment. You need to have a valid reason WHY you're still holding onto a losing investment. Is it because there's evidence it will recover? Or are you just hoping you won't look stupid for making a bad investment? Learn to be honest with yourself, you won't be a perfect investor. We as investors can get too attached to our positions and we need to look at them through an objective lens. Opportunity cost can exist for everything we buy, we just need to learn when it's time to call it a day and move on from a poor choice we made. As always, do your research and happy investing!
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25 Comments
Solo FIRE@solofire · 1moEdited
I think it's important to point out that the true opportunity cost is the failure of acquiring additional future earnings from holding the investment. Stock going down does not always indicate bad investments and opportunity cost. If the fundamentals of a company continues to improve while the stock price is down due to temporary bad sentiments, opportunity cost does not apply here as it will simply increase future expected return from the current price. I've earned significant returns from continue holding and doubling down on this kind of situations.
Paul @mrwhite007 · 1mo
Yip! Currently holding $BLOX and $YBTC and wish I hadn’t bothered. Mercifully tho YBTC has broke even on the payouts, but BLOX isn’t even close! I am booking their funerals tho!
Carter the Investing Cat@takoyaro · 1mo
I hold on to losers for different reasons. While I know they may never recover, I don’t want to just dump them unless I can use the loss to offset gains elsewhere for tax purposes. Also, when a company loses value it’s a good opportunity to reevaluate the fundamentals and determine if it’s still a solid investment. Just because a stock falls out of investor favor doesn’t mean it’s a bad stock.
Renee Glover@tradingdiva · 1mo
$MSFT got me for 25%
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