Why there's always a cost to investing

Everything has a cost in investing, you just have to work out what's worth your money. Here's a look at what opportunity cost means when it comes to investing.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investing can be a tricky game – just the act of choosing one single company (or fund) at a time out of thousands of options to deploy your hard-earned cash into requires a lot of intestinal fortitude and conviction. For example, if you've chosen a stock based on what you perceive as a cheap price, you are doing so because an army of other investors are avoiding your choice like the plague.

You have to weigh up the risks and regards, the positives and negatives of every choice, because (unfortunately) your capital is limited whereas your choice of investments is almost unlimited.

Every investment is a choice but also has a cost. Sure, there are your normal costs associated with investing, such as brokerage, fees and taxes.

But I'm talking about opportunity cost here.

Like most things in finance and economics, every cost can be measured not just with money, but with what you're not buying.

When you're going out to pick up a new car, buying a Ford will normally mean you're not going home with a Toyota.

Similarly, if you really like two ASX companies – say Commonwealth Bank of Australia (ASX: CBA) and BHP Group Ltd (ASX: BHP) – but only have $500 to invest, you're going to have to choose. The cost of picking up some CBA shares is not only $500, but also the opportunity to own BHP.

Of course, you could just buy an index fund like Vanguard Australian Shares Index ETF (ASX: VAS), which buys you a small piece of every ASX company out there, but even doing this might exclude you from owning the iShares Global 100 ETF (ASX: IOO) or the US-focused iShares S&P 500 ETF (ASX: IVV).

Every investment has a cost and shuts you off from another one.

So every time you think about buying some shares, making sure there's not another better option out there sounds elementary (dear Watson), but is foundational for investing success. As Warren Buffett says, you don't have to swing at every pitch that's thrown at you, you just have to wait for the perfect ball.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

Man pointing an upward line on a bar graph symbolising a rising share price.
How to invest

How to invest when the ASX hits a record high

Worried about buying at today's prices? Here's why you shouldn't be concerned.

Read more »

A man wearing glasses sits back in his desk chair with his hands behind his head staring smiling at his computer screens as the ASX share prices keep rising
How to invest

Lessons from a self-made ASX millionaire

Here's how he did it.

Read more »

A couple cheers as they sit on their lounge looking at their laptop and reading about the rising Redbubble share price
How to invest

$20,000 in savings? Here's how to target $1,000 of passive income each month

This could be the easiest way to build a meaningful passive income from the share market.

Read more »

Three happy office workers cheer as they read about good financial news on a laptop.
How to invest

The 3 rules new ASX share investors should always follow

These rules could help you generate wealth in the share market.

Read more »

Person holding Australian dollar notes, symbolising dividends.
How to invest

How to build a $1,500 monthly income stream with ASX dividend shares

It isn't as hard as you think to build a monthly income stream on the share market.

Read more »

A smiling woman sits in a cafe reading a story on her phone about Rio Tinto and drinking a coffee with a laptop open in front of her.
How to invest

How to start your ASX share portfolio with just $1,000

Investing doesn't need to be hard. Here's an easy way to start.

Read more »

Happy young woman saving money in a piggy bank.
How to invest

How I'd invest $250,000 in Australian dividend stocks to never worry about money again

Here are a number of stocks that could be top options for income investors with money to put into the…

Read more »

Warren Buffett
How to invest

5 easy steps to invest like Warren Buffett with ASX shares

It isn't as hard as you might think to invest like the Oracle of Omaha.

Read more »