[Summary]
Opportunity cost is a way of thinking that considers the value of options not chosen.
Opportunity costs can be easily seen when they are used in situations where they are useful and when they are difficult to use.
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.
Thinking about opportunity costs in practice
If we look at opportunity costs as an example, we first make narrow assumptions. 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.
- Focus on one situation where opportunity cost works well
- Even if the price movements are similar, if the background is different, they are treated as different things.
- View not only successes but also failures using the same criteria.
- Check if you can reproduce it with your own amount of funds
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 example, your judgment will be inaccurate if you treat it as a standalone buy/sell signal.
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.