The investment market is unpredictable and therefore a good chance to invest can arise at any time. To try to ensure that these periods are taken advantage of, some investors set up the so-called opportunity reserve.
In theory, this strategy could work well and even present differentials for those who want to make money . However, further reflection may demonstrate that the alternative is not as interesting as it sounds.
In this content, I explain why booking an opportunity might not be the best choice. Check out!
The concept of booking opportunity
Before we can assess whether the opportunity reserve is adequate or not, it is necessary to understand what it represents, in theory. First, it needs to be distinguished from the emergency reserve , which acts as a safety mechanism in case of financial and budget unforeseen events.
They have some similarities in their strategy, which consists of leaving an amount invested in an investment that is liquid and safe. However, the intention is different: in this case, the idea is to create a store of value to make investments when opportunities arise.
This amount can be used, for example, in a period of a market downturn. That’s what would have happened to an investor who used his opportunity to reserve in the fall stock value es caused by the coronavirus crisis. In this situation, the acquisition of shares would be cheaper.
The Problems of Using Opportunity Booking
For many investors, it makes sense to keep resources separate, yielding some money, until they can be used for better opportunities. However, I think this strategy has some problems.
Under-allocation while waiting
Thinking about the concept of the opportunity reserve, it is necessary to leave the money invested in a liquid and safe alternative. This is because you will need the values if a potentially favourable condition arises.
However, the measure requires that the amount remain misallocated while the opportunity does not appear. Think of the example of the investor who waited for the 2020 financial crisis to enter the market.
He would have been out of the market for several years and lost the appreciation that occurred with the growth of the stock market. Keep in mind that the advance has been maintained over time, without a major drop in the period.
Therefore, the investor would have lost the chance to receive dividends and to explore the appreciation in relation to what was initially allocated. In practice, this means that there are more opportunities missed than taken.
This under-allocation is problematic because it makes the return on the investment portfolio perhaps lower, considering the long term. So, even if you go through a positive situation, you may have a lower average return due to waiting for the ideal opportunity.
Impossibility to predict the future
As seen, the idea of this reserve is to leave the financial amount invested in another alternative until a good chance appears. However, due to the unpredictability of the market, there is no way of knowing when this opportunity will arise
For example, there may be a very long stock market rally, with no prospect of a fall. Meanwhile, your money will be in less profitable financial investments, waiting for a moment you don’t know when or even if it will happen.
After all, there is no way to predict how long a rise will occur, just as it is not possible to anticipate a crisis. To top it off, trying to guess the future can lead to missed opportunities to invest and accumulate capital.
Imagine that market growth lasts 5 or 10 years, but you are waiting for a downturn to invest. In practice, this means that you have lost all that accumulated earnings time by keeping the money invested in a less interesting alternative.
Difficulty recognizing opportunities
In theory, the opportunity reserve predicts that those who invest will be able to identify the downside to take advantage of it and potentially maximize earnings. The problem is that this identification rarely happens in reality.
This is because it is easy to look back and recognize a situation in relation to downturns and the appearance of opportunities. However, when they happen, the process is not so simple to identify.
As such, it is difficult to know how to use the fall to your advantage because there is often no way to be sure that the market is falling. Mainly, it is not possible to predict how far it will fall and what will be the lowest value reached.
Returning to the example of the stock market crash caused by the pandemic, think of an investor who had a reserve of opportunity at the time and decided to use it. When the stock market went from 120 thousand points to 110 thousand points, he may have exploited the movement with part of the money.
Then, seeing the drop to 100,000 points, he could have used what was left. However, the drop was even more pronounced, reaching just over 60 thousand points. In this case, the investor would probably no longer have the resources to explore the alternative.
Now, it is worth knowing the alternatives that the financial market offers to choose the most suitable for your case. Know that, regardless of the amount you have available, there are several options to invest.
Taking advantage of investment opportunities
Although I believe that opportunity buffering doesn’t work so well in practice, that doesn’t mean that investors shouldn’t seek and capture good chances that arise. The difference is that I don’t think it’s necessary to devote as much energy to creating and maintaining a significant backlog of opportunities.
Rather than focusing solely on market declines, it may make more sense to look for an allocation that is consistent with your investor profile . In this case, the appreciation that occurred throughout the investment period is taken advantage of.
Even accelerated declines can be exploited — they just don’t necessarily depend on the reserve of opportunity. Keep in mind that, with good financial planning, investors can maintain their monthly contributions.
Thus, if the opportunity arises, it will be able to use these resources to contribute in better conditions. All this without having to under-allocate the money and without trying to predict the future.
As it was possible to notice, the opportunity reservation may not be so interesting to achieve the desired results. Instead, put together a solid investment strategy to a financial planning robust may be the ideal alternative.