Opportunity cost: the hidden cost of playing safe

In the realm of investing, opportunity cost is the potential return you give up by choosing one investment over another. It's the "what could have been" scenario that can haunt investors who err on the side of caution.

For example, let's say you have $10,000 to invest. You could put it in a savings account that earns a guaranteed 4% annual interest rate. Or, you could invest it in the stock market, which has historically returned an average of 10% per year.

If you choose the savings account, you're guaranteed to earn $400 per year in interest. However, you're also giving up the potential to earn $1,000 per year if the stock market performs as it has historically.

The $600 difference is the opportunity cost of choosing the savings account over the stock market.

Of course, the stock market is not without its risks. There is always the possibility of losing money. However, over the long term, the stock market has been a very good investment.

For example, if you had invested $10,000 in the S&P 500 index in 1970, it would be worth over $600,000 today. That's a compound annual growth rate of over 10%.

So, while there is always risk involved in investing, the potential rewards can be great. And the opportunity cost of missing out on those rewards can be significant.

The hidden cost of playing it safe

The opportunity cost of playing it safe is often overlooked. When you choose a low-risk investment, you're not just giving up the potential for higher returns. You're also giving up the potential to grow your wealth over time.

For example, let's say you're saving for retirement. You're 30 years old and you have $10,000 to invest. If you put that money in a savings account that earns 4% per year, you'll have $67,275 by the time you retire at age 65.

However, if you invest that money in the stock market and it earns an average of 10% per year, you'll have $317,123 by the time you retire.

That's a difference of over $249,848!

So, while playing it safe may seem like the smart thing to do, it can actually cost you a lot of money in the long run.

The importance of taking calculated risks

Of course, not everyone is comfortable taking risks. And that's okay. But it's important to be aware of the opportunity cost of playing it safe.

If you're young and have a long time horizon, you can afford to take more risk with your investments. The stock market may go up and down in the short term, but over the long term, it has always trended upwards.

So, if you're willing to take some risk, you could potentially earn much higher returns than you would from a low-risk investment.

Just remember to do your research and invest in assets that you believe in. And don't panic if the market takes a downturn. Just stay the course and you'll be more likely to reach your financial goals.