The Sleeping Point of Your Portfolio
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Have you ever woken up shuddering in the middle of the night frantically checking your portfolio and worrying about the deepening red in some of your positions? If you're highly leveraged or heavily in risky assets, this may be a somewhat common occurrence especially in these days where every day seems to bring about a fresh new wave of red. In A Random Walk Down Wall Street by Burton G. Malkiel, he talks about a non-quantifiable quality of our portfolios - the sleeping point, the point where we can get a good night's sleep without worrying about the ups and downs of our portfolios.
Everyone Needs a Sleeping Point in their Portfolios
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While all of us want to double or triple our portfolios overnight, not many of us can bear with a portfolio that decimates half its value in the same period of time. Knowing that your portfolio value may halve because of a freak incident overnight can be a scary thought, causing sleepless nights and incessant portfolio checking. In my opinion, living like a zombie and checking your portfolio constantly isn't a great way to live your life. And the solution to having better sleep at night and living a more relaxed life is probably just to cut down the risk in your portfolio until it hits that point.
This sleeping point varies wildly from person to person. A person with a low risk appetite may have trouble sleeping even with a portfolio full of ETFs, but someone on the other end of the spectrum may be totally fine with a portfolio chucked full of volatile shitcoins. Understanding your own risk tolerance and investing goals can help find this sleeping point and I think it is something that everyone should do.
Adjusting the Sleeping Scale for Cryptocurrency
The original sleeping scale of investments included assets like fixed deposits in banks, money market funds, bonds, ETFs, and individual stocks - all pretty tame stuff. Clearly, if you are in the cryptocurrency sphere, the risk that you're willing to take is already pretty huge. Here's what the sleeping scale may look like for some people in the world of cryptocurrency.
| What type of Sleep you get | Type of Asset | Expected Return | Risk Level |
|---|---|---|---|
| Sound night's sleep | Top 10 cryptocurrencies | -50% to 1000%, no one really knows | While relatively risky compared to traditional assets, the top 10 cryptocurrencies are often much less volatile. |
| Maybe waking up in the middle of the night once due to an unpleasant dream | Top 100 coins | -99% to 10000%, no one really knows | Coins slip in and out of the top 100 pretty often depending on what is the flavor of the month. Some coins fade into obscurity with a -99%, but others may end up giving a 100x. |
| DeFi Staking | Same as above | When it comes to DeFi staking, usually there isn't too much risk these days due to how battle-tested most contracts are. Just provide LP and reap the rewards. The only issue is that high LP rewards often mean providing LP to low-liquidity and unknown coins, increasing the risk level. | |
| Waking up multiple times through the night, nightmares common | New coins in the BSC casino | -100% to 100000%, no one really knws | The BSC casino is very enticing - new coins with "Shiba", "Inu", "Doge", or all of the above are routinely created and consequently rugpulled. Will you get rugpulled in your sleep? |
| NFTs | Same as above | The NFT market is largely illiquid and you could find yourself with a useless asset if no one is buying. Who cares if the floor price is 1 ETH? | |
| Insomnia | Margin on anything | Unlimited downside and upside | Err... I wouldn't be sleeping with a leveraged position open for sure. Scamwicks do happen and you could lose everything very easily. |
Of course, this is only one possible version of the scale. Some people may still sleep well with an open 50x long on BTC, but I wouldn't do that personally. What's important is to find out what your sleeping point is, and sell your risky assets down until you hit that point. High expected returns can only be accompanied by taking on the equivalent amount of risk and having lowered sleep quality is a result of taking too much risk.
Conclusion
Can you sleep well at night knowing how your portfolio is allocated? If not, it may be due time to start de-risking and consolidating your portfolio. Having a 100% allocation to new BSC shitcoins may be exhilarating, but I'm also certain that it'll cause you great stress and an inability to rest well at night. Hope you enjoyed reading!
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