Academia defines opportunity cost (risk) as the benefit one misses when choosing one alternative over another. The formula is: benefits of option A – benefits of option B. Of course, in academia, we know the future benefits as fact since we all possess a crystal ball.
In the real world, actual benefits (or in our case returns) aren’t realized until after the fact. If you had an expectation that ABC stock would return 12% per year while XYZ stock would return 8%, you would rightfully invest in ABC. In reality, ABC stock could post a 2% return while XYZ posted 80%. We will only know for sure after it has occurred. Obviously at that point, unless you have a time machine, it’s moot.
I tend not to worry about Opportunity risk. While you can conduct some type of analysis to address it prior to investing, I can guarantee you one thing. (Yes, a guarantee). No matter the time period, no matter the market, no matter the comparison – I promise you that you’ll find something that did better. You may be an excellent trader – but someone did better. You may have a stock that went up 1000% but one probably went up 1500%. ETSY stock was up 132.62% in 2018 while the S&P 500 was down 4.56%. Playing the game of, “I should have invested in that”, means you would have put your entire account in ETSY on 12/31/17. That is unrealistic. You can’t play the hindsight game without including all scenarios. On 12/31/17 would it have been prudent to invest 100% of your account in ETSY over the S&P 500? Technically, if you are playing hindsight, you should have put 100% of your account in Bitcoin on 12/31/17.
Many let perfect be the enemy of the good. I’ve witnessed, and am sure will continue to see, individuals abandon a perfectly good investment strategy because they were enticed by the glamour of a strategy that happened to outperform during the timeframe they measured. It’s ironic the most prevalent disclosure is “past performance is not indicative of future results” yet people continue to ignore it.
You should judge the success of your investment based on what your goals and objectives are. Further, you must make sure you do not have unrealistic goals and objectives. I knew a portfolio manager that said the goal for your personal account should be to double it every year. That’s nonsensical and unrealistic. I know for sure this portfolio manager didn’t achieve this so why make it a goal?Unfortunately, financial media fuels the irrational behavior with their attention-grabbing headlines. “If you would have bought $100 worth XYZ in 2000 you’d have $900 billion!!” If ifs and buts were candy and nuts. These articles never provide an actual person that executed the trade and that’s because they are playing arm-chair quarterback. A lot of investors think investing is about winning the lottery. It may sound cliché yet the key is to keep getting singles. The grand slams are few and far between and mostly by pure chance.