[PB Notebook] Is There Such a Thing as a Free Lunch?

Moon Ilyoung, Team Leader of Shinhan Bank PWM Hannam-dong Center

There is a British proverb that says, "There is no such thing as a free lunch." It became famous after being quoted by American economist Milton Friedman in his essay titled "If You Put the Words 'Economic' and 'Eight' Together." It means that every economic activity in the world incurs a corresponding cost or price. Even a lunch with Warren Buffett, known as the "Sage of Omaha," costs 19 million dollars, approximately 26 billion Korean won.

However, some economists argue that "there is a free lunch." One of them is Harry Markowitz, who created the modern portfolio theory and won the Nobel Prize in Economics. He said, "Asset allocation is the only way to have a free lunch." By combining assets with low correlation, one can reduce volatility and achieve efficient investment.

According to a survey by the Financial Analysts Journal, the factors determining investment success are asset allocation 91.3%, stock selection 4.8%, market timing 1.8%, and others 2.1%, with asset allocation accounting for the largest portion. Many wealthy clients met at the PB (Private Banker) center are the same. Although there may be some differences depending on lifecycle and age group, they naturally invest in asset allocation portfolios by following their PB's advice or their own investment philosophy.

National Pension Service, the largest fund management institution in Korea, also diversifies its portfolio by asset class and practices asset allocation investment. Looking at the annual returns over the past 10 years, except for 2018 and 2022, it has generated profits every year. In 2023, it achieved a 9.97% annual return, and the cumulative average annual return over 35 years since 1988 was 5.11%. This means the principal doubled approximately every 14 years. Accordingly, funds and ETFs (Exchange-Traded Funds), TDFs (Target Date Funds) that invest through asset allocation like the National Pension Service continue to attract attention in the capital market.

Of course, just as the National Pension Service had years without profits, asset allocation portfolio investment does not always guarantee returns. Losses can occur, and there is the downside of not fully benefiting from a strong bull market in stocks. However, considering that it is a sustainable investment that reduces volatility and limits maximum drawdown while maintaining profitability, it is worth thinking about why wealthy individuals diversify their investments. Even if it is not a large sum, why not start practicing asset allocation portfolios today, even with small amounts or installment savings?

Moon Il-young, Team Leader, Shinhan Bank PWM Hannam-dong Center