What is a free lunch?

Since then, other businesses have successfully applied similar marketing strategies. Many Canadians shop more at stores offering “free” reward points, even though we’re aware the cost is built into the prices. We download “free” apps paid for with advertising and sign up for “free” trials we end up paying for when we forget to cancel before the deadline.

“There’s no such thing as a free lunch” asserts that nothing comes without a cost. We all know that “free” services like public libraries, health care and the fire department are paid for with tax dollars. Sometimes who pays the cost is less obvious. In 2024, McDonald’s eliminated “free” smiles from its menus in Japan after realizing it was a barrier to hiring Gen Z workers. Potential recruits weren’t willing to provide smiles on demand. Mandatory smiling undermined their authenticity, a cost they wouldn’t accept in return for fast-food wages. 

Is diversification a “free lunch”?

Nobel Prize–winning economist Harry Markowitz is widely quoted as saying diversification is a “free lunch” for investors. When you construct a portfolio of investments, you don’t pay extra for diversification. You pay the same cost for each investment as if you made the purchases separately. But by diversifying, you gain the benefit of reducing your risk. Instead of “putting all your eggs in one basket,” diversifying reduces the volatility of the overall portfolio. The risk reduction of diversification is your “free lunch.” 

Critics, however, have argued that diversification isn’t really free. A diversified portfolio can cost you more time and money to research and manage. Some investors experience emotional costs. Holding unfamiliar asset classes can be uncomfortable. For example, if you own only equities, adding bonds can be stressful. And with diversification, some assets are always underperforming. Resisting the urge to sell investments when they’re down can be challenging for some people. 

Example: “A paper published in the Journal of Risk and Financial Management studied returns for the S&P 500, concluding that ‘diversification generally came at a cost through lower returns, and thus, was not a free lunch.’ The author also found ‘no evidence’ that Harry Markowitz ever said it was one.”

Read more about investing strategies:

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About MoneySense Editors

MoneySense editors and journalists work closely with leading personal finance experts in Canada. Since 1999, our award-winning magazine has helped Canadians navigate money matters.

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