moneyFYI
Financial Freedom Is Merely Organized Common Sense
Opportunity Cost Is Always Present
All smart investors pay attention to opportunity cost.
Life is about choices. Choosing one thing automatically includes “not choose” for everything else. Opportunity cost is the amount given up by choosing one way instead of choosing something else.
The future is unknown and some of your choices will turn out to be less than the best. Some will even be wrong. Nonetheless, we must make choices.
That is what investing is all about. Allocation of capital.
The last 10 years
Ten years ago, there were many people who allocated money to gold. That has been a not bad decision. In late February 2008, it was US$ 950.63. It is now US$ 1,340.54. About 3.5% compounded return before expenses. Not terrible.
Other people bought the S&P500. The total return index has moved from 2,161.51 to 5,309.90. About 9.4% before fees and costs.
People chose gold for a reason
They were concerned about the state of the world and what it might become. Gold was, or appeared to be, a safe haven. The value of that safety motivated their purchase. Was it wrong? Maybe in retrospect, but we can’t use retrospect to make the decision.
Every decision you will make will have an opportunity cost.
This one cost about 5.9% annually to put in place and hold for 10 years. $100,000 in gold became $141,000. $100,000 in the S&P 500 became $246,000. The price of safety being about $10,000 per year.
A fair price? Who knows and it doesn’t really matter. No one could have known the ten year future in early 2008 so they made their best guess. Ideally they estimated that the S&P 500 would under perform its long historic average return, and gold would be necessary to deal with some potential chaos. Both parts together make sense of the decision.
Not many looked at both, but relied on the potential chaos for validation. Fear and its defenses have a price.
What should someone do now?
It depends. If you have time before you need the money, then what would make you believe the S&P 500 would behave differently than its long term normal? Is it possible that China will overtake the US and returns in the United States will be lower? Sure it is. A lot lower? Not so much.
Allocate capital based on reasonable possibilities.
If you estimate China to be better than the US, then some capital should be there. Some in the US too because you can understand the reported results better. Some in gold because chaos is not impossible.
How much is a little harder.
FOMO
Fear of missing out is debilitating. And, you will always miss out. Something is always better and you can’t tell what ahead of time. So stop worrying about it. Every decision has opportunity costs. You must seek what you need not perfection.
Manage what you can
Reduce actual costs. Things like fees and taxes. Not difficult.
Reduce emotional costs. Do you sell when the market falls and buy when it goes up. You need a formula. Diversified and rebalancing is common. Whatever you choose, be sure you can think it through. Buy for a reason and refuse to choose something else for a reason.
Write down your reasoning. Every once in a long while review your performance and your initial reasoning. What has been different from what you expected and why? Like managing a business plan, you look for differences. The things that are as expected may be ignored for now. Cuts down on your time commitment.
Revisit the decision process and write down again.
Success comes with the 3Rs. Record, review and revise. It isn’t music theory.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.
In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. don@moneyfyi.com 866-285-7772
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