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
