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Opportunity Costs April 15, 2008

Posted by shaferfinancial in Uncategorized.
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As we deal with the effects of the recession (gasp I said the word), I have been asked how investors should deal with the business downturn.  Common wisdom says to never sell in a recession when the price is down, but I believe that is not quite true.  Where that comes from is Wall Street, which assumes that folks are invested in the market looking for average returns over the long haul.  If that is your goal then the advice holds.  But investors looking to build wealth need to take a different view.  Each different economic situation requires some thought as to where to place one’s money.

People who are attuned to opportunities that might present themselves are always analyzing data.  For example, if you own rental property in an area where rents are decreasing and property value is steady or decreasing does it make sense to hold onto that property?  Or does it make sense to exchange that property for one in an area where the fundamentals are more solid and the numbers make more sense?  Same with stock ownership.  Does it make sense to own the stocks you own or are there other stocks where the fundamentals make more sense?  

The bottom line is to achieve better than market returns, you must always understand that by keeping your money in one investment you lose the ability to put it in another.  It is called opportunity cost.

Now Warren Buffett says he holds stocks as long as the fundamentals remain intact and I think that is good advice for all types of investments.  As long as the fundamentals haven’t changed, you ride out the recession.  However, if the fundamentals do change you are best to sell and find an investment with better fundamentals so as to not forego opportunity costs.

 

**As usual take this and all other advice from Shafer Financial with a grain of salt.  I do not have a real estate or a stock pickers license so I can’t give advice on specific real estate properties or stocks.  This is just the musings of the author meant for entertainment only!!!!

   

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