[Summary]
Opportunity cost is a way of thinking that considers the value of options not chosen.
The advantage of opportunity costs is that they do not guarantee profits, but that they make it easier to organize the materials you need to look at.
In actual investing, the starting point is to compare how you invest, work, and spend your time. However, it is important to be careful that it is easy to think of only visible expenditures as costs.
In this article, we will organize opportunity cost not as "knowledge" but as a step to check before buying or selling. Don't rush to conclusions, read according to your financial amount and time horizon.
First, divide by opportunity cost.
When looking at opportunity costs, first determine what you want to decide. The information you need will change depending on whether you want to know the meaning, confirm before buying or selling, or review your current holdings.
Especially for beginners in investing, the easier the words are, the more they tend to take them as a conclusion. Opportunity cost is not the only factor in determining decisions. If you want to check it, it is more realistic to look at it in conjunction with fund management, holding period, and opposing materials.
Don't overestimate the benefits of opportunity costs
When looking at opportunity cost as a benefit, first make a narrow premise. It is important not to mix up whether you are talking about the market as a whole, individual stocks, NISA or long-term funds.
Checking the following points will make things a lot easier.
| Axis to check | Looking at opportunity costs |
|---|---|
| purpose | What do you use to judge? |
| Time axis | Which is closer to short-term trading, long-term holding, or NISA? |
| basis | Which one is more important: price, business performance, interest rates, exchange rates, or psychology? |
| risk | When things go the other way, where should you look again? |
| action | Will it lead to buying, selling, or doing nothing? |
Points that can easily cause trouble in making decisions
Opportunity costs don't only trip you up when you lack knowledge. In fact, there are situations where we interpret something conveniently because we know a little bit about it.
- Decide first what you will be able to see in terms of opportunity cost.
- Differentiate between conditions that bring about benefits and conditions that do not.
- When expectations are too high, test with a small amount
- Write down the terms of withdrawal before considering profits.
The important thing here is not to settle on one correct answer based solely on opportunity cost. In investment, the meaning of the same material changes depending on the market, holding period, and amount of funds. When in doubt, prioritize confirmation over conclusion.
Checklist before buying and selling
Before using opportunity cost as a deciding factor, check at least these five things.
- Can you explain in one sentence the purpose of looking at opportunity costs?
- Have you confirmed one or more countermeasures or failure conditions?
- Are you investing your living funds or money that will be used soon?
- Have you decided in advance the criteria for cutting losses, taking profits, and continuing to hold stocks?
- Are you making judgments based only on social media or short headlines?
Checklists are simple, but they prevent you from adding reasons after making a decision. The purpose of checking opportunity costs is not to act faster, but to reduce unnecessary errors in judgment.
Summary
Opportunity cost is a material for organizing investment decisions. Even if you read it as an advantage, treating it as a stand-alone buy/sell signal will make your judgment difficult.
The points to keep in mind are as follows.
- Determine the purpose of looking at opportunity costs first
- Do not mix time axis and amount of funds
- Check not only good materials but also negative materials
- When using NISA and long-term funds, consider how to handle losses
- When in doubt, reduce your position or postpone it.
The more knowledge you have, the safer it seems, but in the market it can become dangerous if you use it incorrectly. It is realistic to treat opportunity cost as a tool to pause before buying or selling, rather than as a word that forces you to make a hasty decision.