What is a Sleep at Night Portfolio and How Can You Build One for Yourself?
Planning for your future can be a ride of mixed emotions. While the excitement of seeing your money grow, beat inflation, and accumulate in a steady manner works as a positive affirmation, it is hard to ignore the stress that comes along. Every asset class presents a certain level of volatility and risk. This risk is not always bad, as it can translate to higher returns. This is why many investors are willing to take on greater amounts of risk with an aim to earn better returns. On the other hand, some investors may find it hard to add risk to their portfolios. Conservative investors do not mind comparatively lower returns, as long as it offers them steady returns with low volatility.
Regardless of what you choose, the primary idea behind investing is to find a blend that helps you sleep at night, knowing that you are moving closer to your goals. An investment portfolio that does not match your goals and risk appetite will likely stress you out and keep you up at night, doubting your decisions. If the risk-return quotient is low, you might worry about not being able to fulfill your goals or not beating inflation. Likewise, if the risk-return quotient is high, you might worry about losing your money to market volatility. It is also wise to consult a financial advisor to find the right risk balance in your investment portfolio and to help you create a sleep well at night investing model that’ll bring you peace of mind.
The sleep well at night investing model aims to solve this dilemma with optimal investment diversification and by choosing asset classes that are suited for your goals and tolerance to risk. Keep reading to know more about this method of investing and how you can build a sleep well at night portfolio for yourself.
What is a sleep at night portfolio?
Sleep well at night investing refers to a form of investing that quite literally helps you sleep stress-free at night. Unfortunately, there is no fixed formula to create an investment portfolio that guarantees returns and keeps all your worries at bay. When you invest your money, there is always a certain level of risk involved, no matter the instrument you choose. However, based on the advice of experienced financial advisors and experts, it can help to create a portfolio that is optimally diversified. This implies that in order to create a well-performing portfolio, you must consider investing in a combination of direct equity or stock, equity mutual funds, etc., as well as fixed income instruments like stocks, government, municipal, or corporate bonds, treasuries, etc.
An investment portfolio with enough diversification and the right blend of different asset classes can lower risk,the possibility of loss, and increase returns. This happens because you do not put all your eggs in one basket and instead distribute them evenly.
How can you build a sleep at night portfolio for yourself?
As mentioned above, a sleep at night portfolio is one that is well-diversified and stands the test of time. In general, as an investor, you may have the following concerns about investing before you start:
- Does my investment portfolio offer inflation-beating returns?
- Will my investments offer me a steady income in retirement?
- Are my investments tax-friendly?
- Do my investments require active management or monitoring, or can I adopt a passive style of investing?
- What are my liquidity concerns, and are they being addressed?
- And more.
In order to ensure that your requirements are being met, you can construct a sleep at night portfolio that contains the following options:
1. Index funds
An index fund is a type of mutual fund or exchange-traded fund that follows a benchmark index like the S&P 500 and aims to mimic its performance. It may help to add a low-cost index fund comprising 500 large to medium high quality U.S. companies, such as Apple Inc., Amazon.com Inc., Microsoft Corp., Facebook Inc., Berkshire Hathaway Inc., Tesla Inc., Johnson & Johnson, JPMorgan Chase & Co., etc. There are several benefits of investing in an index fund, such as:
- They offer diversification: When you invest in an index fund tracking the S&P 500, you invest in a fund that holds 500 different stocks. This diversifies your portfolio and enhances its performance. Your earnings are not limited to the performance of just one company and instead have a higher potential to do better.
- They offer low costs: Index funds come with a low management fee. Since these are passive investment instruments, the associated costs are a lot lower than actively managed investments. In an actively managed investment, the operational, management, and administrative costs can eat into your earnings. But a passively managed investment like an index fund only follows the benchmark index, and there is very little work required by the manager.
Bonds bring in the sense of stability to your investment portfolio. Bonds can be described as a type of loan, where you are the lender. Government, municipal, and corporate bonds raise capital for different types of projects. In return, they pay the investors a fixed percentage of interest as dividends every year until maturity. After the bond matures, you receive your principal investment. When you invest in a bond, you gain many advantages, such as:
- They are comparatively safer: Bonds are a safer investment option than stocks. This is because bondholders are given precedence over shareholders in the event of bankruptcy. So, in a way, your investment remains safe.
- They are ideal for capital preservation: Bonds are instruments that aim at capital preservation rather than capital appreciation. By adding them to your investment portfolio, you lower the overall risk. This is why they are often preferred by investors nearing retirement. They are also great to diversify your sleep at night portfolio.
3. Blue chip stocks
Blue-chip stocks are stocks of well-performing companies. These stocks have been named after blue chips of the game poker. Blue-chip companies are companies that have a steady and unchanging record of great performance in the past. These are typically among the largest corporations in the world. Here are some advantages of investing in a blue-chip stock:
- They offer portfolio diversification: When you invest in a blue-chip stock, your money is further invested in a number of different channels. Blue-chip companies generate their revenue from various avenues. So, the chances of losing money are greatly reduced.
- They offer stability: With years and years of experience and work, blue-chip companies can deliver steady returns without volatility.
Some examples of blue chip companies that you can invest in include Walt Disney, Coca-Cola Company, Berkshire Hathaway, Alphabet, etc.
4. Real estate:
Real estate investments may be seen as a traditional form of investment, but it holds its ground even in today’s modern world. Real estate, although requires a big investment, is a great way to improve your net worth. Real estate prices can grow substantially over a short period of time and deliver great returns. Moreover, you can also use it to generate income through renting or leasing. These days, real estate investment trusts (REITs) have made it even simpler and a lot more economical to invest in real estate. If you are still uncertain of why you should add real estate to your sleep at night portfolio, here are some reasons that can change your mind:
- It offers growth: Real estate is an ideal option for capital appreciation. Under favorable conditions, the returns on real estate can be a lot more than any other form of investment. Flipping residential and commercial properties has been a tried and tested strategy that has benefited many investors.
- It offers ease of convenience: With new age options like REITs, you can invest in real estate in very small quantities also. You no longer need a massive investment amount to add real estate to your investment portfolio.
- It lets you leave behind a legacy: Real estate can be used to secure your future generation too. It is common for people to leave their homes or offices to their children for their use. This ensures financial protection for your heirs. Moreover, since property rates move upwards over time, your future generations can use it to fund a number of goals by enjoying inflation-beating returns.
5. Cash and cash equivalents:
Cash and cash equivalents are short-term investment options that add liquidity to your sleep at night portfolio. They are suitable for emergency savings and are helpful while addressing short-term financial goals. Some examples of cash and cash equivalents include U.S. government Treasury bills, bank savings accounts, certificates of deposit, corporate commercial papers, money market instruments, bankers’ acceptances, etc. Here are some benefits of introducing these instruments to your investment portfolio:
- They are highly liquid: As they are highly liquid in nature, they can be perfect to park your emergency savings. In case of an urgent financial need, you can redeem your investments easily without any lengthy procedures or hassles.
- They are low risk: These investments carry very little risk. This helps to balance out volatility from your portfolio and also guarantee your returns to a great extent.
- They are suitable for short-term goals: You can use them to invest for short-term goals other than emergency savings too. There are no long-term maturity periods, and your funds can be redeemed without any penalties.
6. Global stocks and new investment options like crypto currency
Exposing your sleep at night portfolio to foreign stocks allows you to invest in wider growth opportunities. You can tap market opportunities of economies outside of your country. This not only amplifies your chances of capital appreciation but also offers better diversification. You can invest in foreign stocks via –
- Global Mutual Funds
- American Depository Receipts (ADRs)
- Foreign Direct Investing
- Global Depository Receipts
- Exchange-Traded Funds (ETFs)
Similarly, new age technology like crypto currencies can be a good addition to your list of investments. Although crypto currency is highly volatile, it has benefited many investors in the recent past. Many financial advisors, experts, as well as investors are skeptical about investing in crypto currencies. The apprehension is absolutely understandable and there is no hard and fast rule of investing in crypto.
However, the idea is to promote a healthy attitude towards investing and be open to different forms and opportunities for further financial growth. At the end of the day, only you can analyze your risk appetite and pick out investments that are suited for your requirements. Whether or not crypto currencies fit the bill is for you to gauge. But in order to be up to date, it can help to understand newer forms of investments. This will help you differentiate short-term fads from long-term viable growth strategies.
If you are interested in crypto currencies, you can consider options like Bitcoin, Litecoin, Zcash, Ethereum, Ethereum Classic, Chainlink. etc. It may be advised to start investing in crypto currencies after consulting a professional financial advisor.
Ultimately, your sleep well at night investing portfolio has to be something that fits your unique requirements. If not, it may only be a cause of worry. Mimicking other people’s strategies or making uninformed decisions will likely result in a lot of stress and financial anxiety. Hence, try to understand the different investment options in front of you first. Next, find out the amount of risk each of them carries. Once you know this, see if the time frame suitable for each instrument matches your financial goals or not. After a careful evaluation, you can go ahead and start investing. Deciding the percentage of allocation of these instruments is also an important task. This too can depend on your unique needs.
If you are not sure about how to develop a sleep at night portfolio, you can consult a professional financial advisor in your area and get started.