Golden Rule - Opportunity cost

Opportunity cost is an economic concept commonly applied to investment. It means 'the next best alternative foregone'. Every course of action and the best has a host of alternatives and the most beneficial choice not taken is the opportunity cost.

By this logic, holding cash has a cost. In a stock market context the opportunity cost is what one would have made if investing in shares and the market had grown. For instance, in a market growing at 10% per annum, £100 today will be worth £110 at the end of the year if invested. The opportunity cost of having the cash in your pocket is £10.