What is eat well, sleep well?
How do you choose the securities in your portfolio? Do you have a basis? There is an adage that we call “Eat well, sleep well” in trading and investments. It sounds like a simple typical text message from a loved one, but in reality, this refers to the risk-return tradeoff. It states that traders do not choose securities for any other reasons. They make choices with only two options: “Do I want to make a higher return, or do I prioritize my peace of mind?” Hence, the risk-return tradeoff is like a balance between potential return desires and risk tolerance.
More on eat well, sleep well
Before anything else, what is a risk-return tradeoff? It is the connection between the probable return amount that can be gained on an investment and the risk amount that an investor is willing to accept to engage in the said investment. Hence, the more the desire for returns, the more risks the investor should be willing to take. Eat well, sleep well states that when investors make up their minds on which securities they want to buy, they make significant considerations of two things: how much returns they wish to gain and how much risk they can tolerate.
But why was it called eat well, sleep well?
The term “Eat well, sleep well” is an adage that says investing in securities with high potential returns can allow the investors to eat well. However, the investor may not sleep well because these investment securities are naturally volatile. They also have more chances of leaving the investor with devastating losses.
On the other hand, the investor can instead choose to invest in assets that have lesser risks. The lesser the risk, the lesser the losses, and the returns are smoother. It means that the investors can sleep better but then, they will have to eat less. It shows that an investor’s risk tolerance plays a significant role in creating an investment portfolio. There should be a balance between the desired return levels and risk tolerance. Thus, we called this tradeoff “Eat well, sleep well.”
Let us classify Eat well, sleep well securities.
Let us start with the securities that will enable the investor to sleep well but not eat too well. They are cash deposits, certificates of deposits or CD, money market funds, and treasury-inflation-protected securities or TIPS. Investors can sleep well because they know that they will not lose their invested money with these securities. However, they might not eat very well for being too risk-averse that they miss better opportunities from other securities.
We also have investment securities that can help investors eat well but not sleep too well. Some of the examples include emerging markets and small-cap stocks. These sit on the high-risk scale. Hence, the investor can eat well if everything goes the way it should but not sleep too well. It’s one of the costs of high returns.
Some valuable insights before we end the topic
They say that stocks help us eat well while bonds help us sleep well. But some would beg to disagree because some fixed-income investments like junk bonds are riskier than index fund that tracks stocks in the S&P 500. However, while all of this is true, what others said about stocks and bonds is something that keeps going in the best of both worlds.