The one true secret to successful investing

There is only one thing you really need to know about investing in 2023, and it is both stunningly obvious and invariably forgotten: There is no free lunch.

Sure, everybody knows that with higher expected returns comes the bigger risk of loss. But time and time again, investors put this most basic rule to the test in a kind of bull market delirium. That explains the last blood-curdling year in investing, the last 15 years, and even the last thousand years.

There is always the latest financial guru claiming to have the key to sure-fire high returns. The real secret to successful investing is that if you keep the simple high-return/high-risk rule in mind, you will never go wrong.

If you are investing in anything other than a safe inflation-protected bond, there is a chance you will lose money. And if you are investing in anything that promises a bigger return than the broader market, you are also agreeing to the potential for a bigger downside.

This should be the first thing people absorb when they learn about personal finance and are introduced to investing. But for some reason (greed?), even people who work in finance often ignore it.

Understanding the risk/return trade-off is also the best way to protect yourself from financial scams. If people promise you they can beat the market, one of three things is true: They are lying, they don’t know what they are doing, or they are charging very high fees and it is not worth it.

The fact that there is no free lunch in finance underpins modern financial theory. No matter what new innovations come our way – high-frequency trading or the blockchain, for two – it will still be true. Just look at the last few years.