Opportunity cost is what you forfeit by taking a certain course of action, even if the action is a decision not to act. Every dollar you allocate to a specific investment is a dollar not allocated to some other investment or purpose. If you allocate, say, $5,000 to stock A and stock B outperforms, your opportunity cost is the excess return you would have realized by buying stock B instead. At the same time, the money you invested in stock A costs you the opportunity of doing something else. By investing the money, you give up the chance to, say, spend it on a vacation or make a donation to your favorite charity.
The endowment effect holds that we value the things we own more than things we don’t own. In one oft-cited study, some participants were given a coffee mug for free while others were not. When the owners were asked how much they would be willing sell the coffee mugs for, they gave a price that was approximately double what those who did not receive the mugs were willing to pay for them. The mere ownership of a free coffee mug increased its value in the eyes of those who were given it. This behavior applies to many other assets as well, including investments. Combined with other biases, such as the disposition effect (an aversion to taking to a loss on a stock) and confirmation bias (seeking out information that supports your viewpoint), investors can end up holding onto investments that an objective third party would otherwise view as candidates for selling. Continue Reading »
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More on AAII.com
- Dishonesty, Choices and Investing – Duke University professor Dan Ariely explained the logic of asking whether you would repurchase an investment if it was sold from your portfolio while you were sleeping.
- When to Sell a Stock: Practical and Profitable Rules – This 2001 AAII Journal article gives 31 guidelines for determining when it may be time to part with a stock (PDF format).
Highlights from this month’s AAII Journal
- Solving the Problem of Retirement – Three actions investors can take to mitigate the problem of retirement placing potentially unlimited demands on finite savings.
- Model Shadow Stock Portfolio: Loosened Buy Rules on New Addition – Due to a shortage of qualifying stocks, the purchase guidance for the portfolio’s newest stock has been loosened.
AAII Sentiment Survey
Even though pessimism rose to a six-week high, neutral sentiment is above 40% on back-to-back weeks for the first time since last fall. More about this week’s results.
- Bullish: 29.6%, down 0.1 points
- Neutral: 40.6%, down 2.9 points
- Bearish: 29.9%, up 3.0 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
Take the Sentiment Survey.
AAII Asset Allocation Survey
Equity allocations rose to their highest level since April 2005, while fixed-income allocations fell to their lowest level since 2009. More about the latest results.
June AAII Asset Allocation Survey results:
- Stocks and stock funds: 68.8%, up 1.4 percentage points
- Bonds and bond funds: 15.0%, down 0.5 percentage points
- Cash: 16.3%, down 0.9 percentage points
June AAII Asset Allocation Details:
- Stock Funds: 35.2%, up 2.5 percentage points
- Stocks: 33.6%, down 1.1 percentage points
- Bond Funds: 12.4%, up 1.0 percentage points
- Bonds: 2.5%, down 1.5 percentage points
Take the Asset Allocation Survey.
The Week Ahead
Dow component JPMorgan Chase & Co. (JPM) will report on Friday as second-quarter earnings season officially starts. Joining it will be seven other S&P 500 companies: PepsiCo (PEP) on Tuesday; Fastenal Company (FAST) on Wednesday; Delta Air Lines (DAL) and Omnicom Group (OMC) on Thursday; and Citigroup (C), PNC Financial Services Group (PNC) and Wells Fargo & Co. (WFC) on Friday.
The week’s first economic reports will be the May JOLTS report on Tuesday and the Federal Reserve’s periodic Beige Book on Wednesday. Thursday will feature the June Producer Price Index (PPI). The June Consumer Price Index (CPI), June retail sales, June industrial production, May business inventories and the University of Michigan’s preliminary July consumer sentiment survey will be released on Friday.Seven Federal Reserve officials will make public appearances: San Francisco president John Williams on Monday; Governor Lael Brainard and Minneapolis president Neel Kashkari on Tuesday; Kansas City president Esther George and Chair Janet Yellen on Wednesday; Chicago president Charles Evans on Thursday and Dallas president Robert Kaplan on Friday.The Treasury Department will auction $24 billion of three-year notes on Tuesday, $20 billion of 10-year notes on Wednesday and $12 billion of 30-year bonds on Thursday.
Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you! Upcoming Meetings »