Sunday, 13 September 2009

Look at all spending decisions as opportunities - won or lost

Most individuals these days are astute enough to understand the power of time and understand the need to fund their own retirement rather than to rely on government programs whose long-term viability don't seem guaranteed anymore.

However, compounding works two ways.

An investment that compounds at, say, 20% annual rates, will swell into a tremendous amount after 30 years.

Conversely, a missed opportunity that could have compounded at 20% a year has the opposite effect on your portfolio. A poorly chosen stock tha rises just 5% a year ultimately costs you tens of thousands of dollars in lost opportunities.

Money that is misspent today and not invested can have the same injurious effect on your future net worth.

At any given moment, you have tens of thousands of investment opportunities worldwide from which to choose. You may decide to put your available cash into shares of Intel or into a home remodeliing project. You may decide to spend $50 at a restaurant, or on a new pair of slacks, or on a new golf putter. You may be faced with the choice of buying a new automobile or funding a college account for a chld. No matter how you choose, every possible use of your money must bring a return - tangible or intangible - or else you should not spend the money. When making the choice of buying, say, shares of Intel or new carpeting, you must think about the opportunity costs of the money spent.

As an investor, you must also look at all spending decisions as opportunities - won or lost. Every dollar spent on a single item is a dollar unavailable for other items. That dollar must provide a suitable return - measured against what you could have earned on that dollar somewhere else.

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