Eat Well, Sleep Well

What Is Eat Well, Sleep Well?

"Eat well, sleep well" is an adage that, referring to the risk-return tradeoff, says that the type of security an investor chooses depends on whether they want to generate high returns or have peace of mind. This tradeoff can be thought of as balancing return needs and risk tolerance.

Understanding Eat Well, Sleep Well

When investors contemplate which securities to buy, they make their judgments based on what level of returns they require, as well as how much risk they want to take on. Risk-return is the relationship between the potential amount of return gained on an investment and the amount of risk an investor must accept to participate in that investment. The higher the return desired, the more risk the investor must accept.

That is where the "eat well, sleep well" adage comes in. Investing in securities with high expected returns offers investors the potential to eat well, but also maybe lose out on sleep, due to their volatile nature and higher probability of dishing out devastating losses. In contrast, investing in lower-risk assets helps to minimize the potential for loss and generate smoother returns, enabling investors to sleep better, at the expense of eating less.

Each investor’s risk tolerance is the single most important factor in constructing an investment portfolio. Investors often must balance their return needs and goals with their individual risk tolerances. This tradeoff can be referred to as “eat well, sleep well.”

Types of Eat Well, Sleep Well Securities

Investments that generally guarantee the least stress are cash deposits, money market funds, certificates of deposits (CD), and Treasury-inflation protected securities (TIPS). Investors that buy these types of securities can sleep safely at night knowing they are very unlikely to lose the money they invested. On the flip side, they will also be aware that being so risk-averse means missing out on the much better potential returns offered by other securities.

Those preferring to eat well, meanwhile, will move much further up the risk scale, investing in racier assets such as emerging markets and small-cap stocks. These kinds of investments are considered to be among the riskiest, and, as a result, the most capable of generating high returns—and sleepless nights.

Eat Well, Sleep Well Method

A popular saying on Wall Street is that stocks let us eat well and bonds let us sleep well. This phrase is a little overgeneralized—there are some fixed-income investments out there, such as junk bonds, that are riskier than, say, investing in an index fund tracking stocks in the S&P 500—but does make an important point about how investors can go about getting the best of both worlds.

In theory, investors can build a portfolio made up of both eat well and sleep well securities. When done properly, allocating capital among different asset classes and industries helps to minimize risk and potentially increase gains.

Diversification is important. Spreading out holdings should insulate portfolios from the ups and downs of a single stock or class of securities.

Special Considerations

Every investor would love to double their capital overnight. However, few are willing to take on the kind of risk such a result would involve.

A lot also depends on age. The rule of thumb is that an investor should gradually reduce risk exposure over the years, switching to less volatile securities as they close in on retirement.

In general, young people are advised to prioritize eating well versus sleeping well. Financial advisors argue that they have time on their side to ride out market volatility and should look to amass the biggest amount of money for later in life. That emphasis gradually changes as the person gets older and needs more money to get by.