Money for nothing. Is that too much to ask for? Dire Straits even wrote a song about it back in the 1980s.
Unfortunately, there's universal agreement that you can't get something for nothing; there is no such thing as a free lunch.
Luckily, the universe is a little bit wrong here. It might be more correct to say there is one free lunch in finance.
A guy even won the 1990 Nobel Prize for proving it with math. His name was Harry Markowitz, and his Modern Portfolio Theory was just a fancy way of saying that if you own a portfolio of different kinds of assets, like stocks and bonds, you can get something for nothing. More accurately, if you diversify your portfolio by owning stocks and bonds, you will increase your returns while decreasing your risk.
To this day, professional portfolio managers reduce risk and increase their returns by building diversified portfolios. And you can, too.
🤹♂️ Diversification
At my financial planning and money management firm, I worked closely with a mutual fund company called Dimensional Fund Advisors. There was a saying that Dimensional’s reps often repeated: “Risk and return are related.”
For example, as a general rule, investors get higher returns by taking on higher portfolio risk. That makes intuitive sense. Here are 10-year total returns of two ETFs that can serve as proxies for a high-risk versus a low-risk investment:
Vanguard Total Bond Market ETF BND: 1.45%