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No free lunch

The phrase “free lunch” suggests that you can get something for nothing. In investing, this refers to the investments marketed as delivering a great return with very little (or no) risk.

Scams and biases

This sounds great, but let’s think about this for a minute…

If someone can get a great return with no risk, why would they set up an investment business? Surely they would just pile all of their money into that “sure thing” and become mega rich.

So what’s the motivation? I think it depends on who is pitching the investment to you.

For the company running the investment, the motivation is generally greed. They are trying to make money from you. This is where scam investment schemes sit and operate. They try to persuade you that they can deliver a good return with zero risk. At best, they are looking to charge you high fees for the privilege. In the worst cases, the investment is siphoned off into their own bank accounts and you can lose everything.

For the friend with an investment tip, the motivation is different. They aren’t trying to deceive you, they are generally trying to help. However, there’s nothing to say that they fully understand what it is that they are pitching. They may also be feeling overconfidence if they have invested in it themselves.

What’s the answer?

The key here is having a framework to make decisions by. This framework should be built around your life goals and should focus on the path to maximise the chances of success and minimise the chances of a big mistake. If you have a well structured financial plan, a robust and diversified investment approach and a well disciplined outlook you can avoid the big mistakes and investment scams.

If you know someone who would benefit from building a robust framework around their finances, please feel free to pass on our details. And don’t be distracted by the promise of a free lunch, if it sounds too good to be true, it usually is!

Note: Past performance is no guide to future performance.