Opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen.

Any time you make a decision, and have to choose between two things there is an opportunity cost.

Because you didn’t choose the other.

Imagine you’re making a decision on what to buy.

You can choose to buy a precious medal like gold or you can choose to buy part of an ETF.

If you choose to buy gold you can’t buy the ETF.

Gold typically increases in value 1-2% a year, whereas a standard index fund like the S&P 500 increases about 7-15% fairly consistently each year.

This is because businesses are creating value, a bar of gold is not.

If you invest in gold there is an opportunity cost of missing the opportunity to make potentially more income with your money.

This is a common perspective famously held by Warren Buffett and many others.

Photo by Peter Olexa on Unsplash.