One of the first things they tell you in Economics 101 is that “there’s no such thing as a free lunch!” Investopedia explains the idea to mean that “even if something seems like it is free, there is always a cost, no matter how indirect or hidden.” This is closely related to the concept of “opportunity cost” which plays a crucial role in a variety of economic theories and in investing.
Last week I was chatting with a coworker about his recent trip to a Verizon store. He had seen an advertisement about how he could get a new phone for free by signing up for a new plan. It sounded like a great deal until he discovered that the cost of the “free phone” was actually built into his monthly payments. Verizon had no intention of giving him the phone for free. They just wanted to trick him into signing a two-year contract. I almost shouted it: THERE'S NO SUCH THING AS A FREE LUNCH!
But what about the couch on the curb with the “free” sign taped to the front? Surely that's free! But there’s the cost of loading it and transporting it home. That time and gas could have been spent elsewhere. If you take that free couch, you can't take another free couch that might be nicer. Not to mention if you put a couch in your living room you can't put anything else in that spot. That couch isn’t free! It’s just really really cheap.
In the eyes of an economist, everything has a cost and while very few of us see the world the way economists do, it’s important to remember the potential for unseen, but still relevant, costs. Even seemingly insignificant decisions come with costs. There’s almost always an alternative use for your money, time, and energy. At this very moment, I could stop writing this article and work on my research or clean my house. The cost of this article is unfinished data analysis and a messy home!
The same is true for investing. There are obvious costs: advisor fees, trading fees, and taxes, but there are also the unseen opportunity costs. As investors, we want to be diligent in maximizing returns while minimizing costs and we want to make sure that the financial choices you make are always in your best interests. If you’d like to learn more about how we do that, feel free to poke around some of our other articles or give us a call.
"There Ain't No Such Thing As A Free Lunch - TANSTAAFL." Investopedia. 2016. http://www.investopedia.com/terms/f/free-lunch.asp.