This is a term related to investing and personal finance. An opportunity cost is not necessarily financial in nature all the time. You will see this towards the bottom of the page that some decisions are a lifestyle and financial trade-off. I am sure you have had to choose between two or more very difficult decisions before and that is where opportunity costs come in.
To help you understand this, an opportunity cost takes place when you make one choice and lose out on the benefits of another. This could be choosing one spouse over another, choosing water instead of soda at a restaurant, or choosing to go back to college while being employed at a more flexible job that pays less. In reality, you are making these decisions every day some are just larger than others.
This is mostly to get you thinking. Many of the ideas you probably understand very well on this page. It is like that say, things aren’t always greener on the other side, so you have make the choice that is the most important to you.
Opportunity Costs In Investing and Trading
The reason why this is talked about with investing is because we only have so much investment capital. The investment world is the land of I should have done this or I should have done that. The truth is that you will see many opportunities but only have limited resources. What I mean by this is even institutional traders who work at large firms such as Goldman Sacks only have so much money to trade.
The goal should be for you to follow your investing and trading rules because they will keep your account equity safe. If your maximum position size is 5% of your portfolio don’t worry if you could have made more money by trading a position size of 25%. Your rules are there to keep your account safe.
Opportunity Costs Personal Finance
Choosing one career over another is an important opportunity cost situation in our personal life. With a career, you have many choices to make. In my younger years, I was a high paid construction worker and left that job to go back to college. My opportunity costs were around $15 an hour difference at the time.
This isn’t always financially related. For example, you might choose one job that you work fewer hours over a job that offers you more perks. The opportunity costs are what is the most important thing to you. Everyone in the United States also has the opportunity to open their own business. You can choose to deal with that boss you dislike or work for yourself and deal with the financial stress.
Your lifestyle is another area which you have to make difficult decisions. One choice that many people have to make is weather to have children. From there they have to choose between losing a stream of income or having one parent stay at home.
In personal finance, I am sure you have participated in hedging against risk and don’t know it yet. Do you own homeowners insurance, life insurance, or auto insurance? Then you are hedging against some random event happening and wiping you out financially. Hedging is important but if it is overdone you might miss out on other opportunists or have less disposable income.
- Opportunity Cost transactions take place everyday
- There isn’t room for regret about opportunity costs in investing and trading
- You have opportunity costs that effect your personal finance
- Have a great balance between your goals, career, and management of risk