Who Are You Dancing With Episode 73

What do you remember about high school? If I had to pick one word that described high school for me, it would be awkward. Let’s go back in time to your high school prom.
And let’s say you’re a senior in high school, and you know of a pretty girl you want to take to prom, but you can’t find the courage to ask her out. You’ve talked to her a little at lunch, but you’re awkward, so conversation has been sparse at best.
Your internal deliberation of when to ask her to the prom is killing you inside. You hem and haw around, and you go home that Friday deflated and dejected by nobody but yourself. You didn’t work up the courage to ask. The pictures below are from a recent walk at Camp Croft State Park.
Did this ever happen to you? You think about the situation all day Saturday because you don’t want to go to the prom alone. You think to yourself how much more fun it would be to have someone to dance with.
You finally determine come hell or high water, you’re going to walk right up to that pretty girl on Monday morning and ask her to the prom.
You walk into school Monday morning and you spot this angelic girl. You bow out your chest, you wipe the nervous sweat off your brow, you walk up to her and blurt out with one breath, “Will you go to the prom with me?”
It was all you could do to get it said. Your nerves had no time for small talk about the weekend or the upcoming biology quiz. You were all business.
The pretty girl calmly replies back that she just accepted another suitor’s request earlier that morning. Now you’re dejected again. You fell victim to opportunity cost. Had you asked her on Friday, she probably would have accepted.
Instead, you went with another girl that you were not as interested in or maybe you ended up dateless and had a mundane time. The memories you could have had were sacrificed because of your inability to work up the courage to ask the pretty girl to the prom.
Can you think of any times you’ve missed out on something because you didn’t act on an inclination?
It’s natural for our sentiment to change. What we are feeling one year may be totally different in a year or two from now.
I’ve seen this play out during my ten years working in financial services, and the biggest driver seems to be who’s in charge of our government. But over the last year, something new has started to develop, and I want to share with you how it may be costing some people thousands.
We are told financial sentiment is driven by two main factors: greed or fear. It’s our basic instincts, and it’s often easy to see which one we are more prone to when it comes to our money.
People tend to lean toward fear or greed, but an appropriate tone is a combination of knowing when to take risks and when to be more cautious and then developing rules for how you are invested. If you don’t have rules established beforehand, you’re just going by feelings, which is not how we want to run our finances.
If we don’t know what to do or we don’t have enough information to make a decision we sometimes default to doing nothing. In our illustration above that’s what the high school boy did. He did nothing and when he did do something the opportunity was gone.
Opportunity cost is the expense we pay when we delay making a decision, so let’s talk about why some people are hesitant.
The last 20 months have been filled with uncertainty. COVID-19 emerged and it has caused destruction, despair, and isolation. Then the government started stimulating the economy by lowering interest rates, printing money, and buying bonds and equities.
Then we had a divisive and contested presidential election that resulted in a new presidential administration. Even now things seem to be uncertain with how these things will play out in the long-term.
And many people have been reluctant to invest their retirement savings. This seems reasonable, right? Well, the bad news keeps coming.
Let’s say you have $500,000 sitting in cash (not invested) in your IRA. If you were able to make a modest 5% return, you end the year with $525,000.
There are about 231 days where the stock market is open every year. If you divide $25,000 by 231 you would get $108.23 per day. For any day you’re not invested and earning 5% in this hypothetical example you are not making $108.23. Obviously, the numbers are simplified for illustration.
That would equate lost opportunity of $2,146.50 per month when you’ve been uninvested. So, your opportunity cost is $2,146.50 per month. What can you do with $2,146.50. Does that pay your mortgage or half of your expenses? Not only are you losing money to inflation but your lost opportunity cost is significant.
If we are going to use a cash equivalent accounts, we need to establish beforehand what the parameters are for when we use it. This is why developing investing rules is important. As always, I’m happy to dive deeper on this topic if you’d like. You may call our office at 864.641.7955.
Until next week,
David C. Treece,
Financial Advisor
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