Saving vis-a-vis Investing

Do you find yourself overwhelmed or confused when making important life decisions?

'Opportunity cost': This is a concept that many of us may know by definition, but to grasp its importance requires real-world experience, the ability to take risks, and more importantly, the acumen to decide when not to.

For readers not from a financial background, opportunity cost is the forgone benefit one may have enjoyed by choosing an alternative. To define this with an example; when you choose to catch a late movie on a Sunday night instead of hitting the gym, you forgo the health benefits that exercise brings as an opportunity cost of enjoying cinema.

Or, for example, when one is given a choice between travelling to office or working from home, there is an opportunity cost in doing any one over other.

When it comes to making efficient financial decisions, the idea of opportunity cost demands consideration. Great rewards can be realised when stakes are high, and even greater losses may be incurred if impulsive decisions are made. To hold or to invest, is a? dilemma most people are challenged with, and unfortunately, very few are able to deal with it wisely. In this article, we explore how one should think about the decision between holding your money or investing in various asset classes.

Always consider the risk-to-reward ratio:? Measuring potential reward and assessing the present risk with decisions is never easy. It may also be an impossible task to accurately decipher the risk and reward in any situation as all factors can never fully be considered. This pushes some to be excessively careful and even pedantic (wildly meticulous) with choices, which rather than yielding the best outcomes, is a recipe for disaster.?

One must take into account absolutes and give less weightage to relatives. Define known risks and be scant with estimated rewards. If this philosophy is incorporated fairly, the opportunity cost will be minimised, and efficient decisions can be made.

Never forget to think macro: Investing is not a linear or single-player game. The decision of every player in the economic machine is going to have, at the least, a minute effect on your assets. Always consider what the major macro players like governments, banks, and large companies are doing, and base your decision to invest or hold accordingly.?

Know yourself and define your goals:? To invest or hold is a very personal and subjective question. It largely depends on what expenditure one may be expecting in the future, and how to plan for it. Some costs can be managed even if the best outcomes are not realised, and hence increasing the risk-bearing capacity. For someone with kids or a college loan, you will have to consider how your actions impact the burden of debt/future expenses.

All things considered, no one can be 100% right with all the choices they make. When it comes to important decisions, one must make sure to fairly examine all the relevant data available, and correlate how actions can result in the outcomes you are aiming for. Build a framework, examine personal biases, and learn from previous decisions/outcomes.