“There ain’t no such thing as a free lunch.”
You’ve probably heard this — TANSTAAFL — at some point in your life.
It was originally coined in reference to San Francisco bars that would offer a “free lunch” to anyone who purchased a beer. There was no cost for the lunch, but it wasn’t really free – at least not for most customers.
The meals were incredibly high in salt, which led the customers to quickly order another beer (which, in turn, led them to order another… and another).
If you’ve ever been to a casino in Las Vegas you may have enjoyed a “free” beer or cocktail served to you while you were gambling.
I’m sure you quickly figured out that the casinos aren’t serving these drinks out of the goodness of their hearts.
The average gambler loses about $60 an hour – or a dollar a minute – in a Vegas casino. If the casino can keep you around for an extra 30 minutes by loading you up with free booze, that means that a $1 investment in a bottle of watered down beer netted the casino an incremental $30 in revenue.
TANSTAAFL Is A Lie
During my undergraduate finance courses and studies for the CFA, TANSTAAFL was drilled into my head repeatedly.
In that context, it referred to the impossibility of arbitrage. In other words, there is no such thing as riskless profit.
You can’t, for example, get a guaranteed 20% return. Any investment with that expected return is going to come with a significant risk of loss.
Any asset with a 20% target return is going to exhibit more volatility and risk than an asset expected to return 4%.
If you want higher expected returns, you must take on higher risk. And vice versa: if you want less volatility, you will also get lower expected returns.
It all sounds very technical and intelligent. As a young professional, I felt a smug sense of superiority every time I informed someone that there was no such thing as a free lunch.
But here’s the thing…
I was wrong. There is a free lunch in investing. There is a way to increase returns without layering on additional risk.
The Magic Penny
Whether you like it or not, few things will have a bigger impact on your success as an investor than taxes. What matters is what you keep — and you only get to keep what’s left after fees, taxes, and inflation have had their say.
A lot of people look at me like I’m crazy when I tell them that taxes are the single biggest determinant of their ability to enjoy a worry-free retirement. So I came up with a way to explain the importance in 60 seconds…
It’s called the Magic Penny:
Still don’t believe me? Check my math here.
Many investors are unaware of the potentially massive impact of taxes on their returns. But, sadly, many of those who do have this realization… do nothing about it. There is a very “defeatist” attitude towards taxes that persists, and that attitude continues to derail what could be worry-free retirements.
The reality is that there are a number of tax advantaged and tax free strategies that virtually any investor can use to earn themselves a “free lunch.”
Tax advantaged investing strategies are a big part of WealthChannel Academy, my weekly show that simplifies the process of planning and investing for a worry-free retirement.
More Reading
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- Should you take Social Security early? See the math behind the decision in this week’s WealthChannel Academy.
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