The Hidden What-If Cost
Yesterday, I shared a meal with a friend. He's a young guy who reminds me of how I was around 20. Like me at 20, he loves investing. And, like me at 20, he prefers to do it irresponsibly and overconfidently. Ah, so many similarities between us. Part of me wants to shake him out of it, but then again, I don't think anyone was going to shake me out of my ridiculous ways back when I was his age.
He revealed to me how he's lost a good chunk of change through his investing practices. Not "lost" as in the market is going down but will eventually come back up. Rather, lost as in, poof, it's gone. It's a lot of money to him, but he did have a good comeback for me. "Travis, you always talk about how we shouldn't do things that financially endanger us or our family. This doesn't put me in danger, and I don't have a family yet."
He makes a good point. He may be out thousands of dollars, but he won't go without food or shelter. He's a single guy with limited financial overhead. However, here's where I want to land this plane. I pointed out to him there's a far more significant consequence at play. It's the hidden what-if, commonly known as opportunity cost. Said another way, it's what he could have done with that money instead of what he chose.
Out of respect for him, I won't use his actual numbers. Let's pretend he made some investing choices that cost him $5,000. Or you could insert a different choice here. Maybe you spent it gambling. Perhaps you decided to have a wild night at the club, or that impulsive trip to _______, or pulled the trigger on that motorcycle you've had your eye on.
Sure, $5,000 less in your pocket may not ruin your life. That's a fair point. But the hidden cost? The opportunity cost is what you could have done with this $5,000 instead of losing it on risky investments. In the case of my friend, I used an apples-to-apples comparison. Since he's trying to make money by investing, I shared an alternative scenario. If invested the right way (broad low-cost index funds with a lot of patience), that $5,000 would be worth nearly $250,000 by the time he turns 65. So, correct, his loss didn't ruin his life......but the cost was quite steep.
We can insert other opportunity cost scenarios here, too. How many hurting families could we have helped with $5,000? How many hungry children could we have fed with $5,000? How much education could we have attained with $5,000? How much quicker could we replace our aging car with $5,000? How many amazing memories could we have created with $5,000? The list goes on.
Yes, it's only $5,000. But it's $5,000!!!! Whenever we make decisions, we must look beyond the direct costs. An opportunity cost assessment will show us our best choice. Follow that one!