Every investor needs to choose a strategy that makes sense for them and helps them achieve their financial goals. The barbell strategy is one investment strategy that might suit your needs if you have the time to properly manage it to make it work properly. We’ll take a closer look at what the barbell strategy is, but if you want a personalized take on how it would play on in your situation, then it’s best to talk over your options with a financial advisor.
What Is the Barbell Strategy?
Typically, investors build a portfolio around their unique risk tolerance. For example, a conservative investor would choose to invest in low-risk assets that are unlikely to lose any money. But an aggressive investor would choose to invest in assets that have high potential rewards. The barbell strategy focuses on investing in both high-risk and no-risk assets. The goal is to strike a balance between these two extreme positions, but you’ll avoid adding any medium-risk assets to the mix.
How To Put the Barbell Strategy Into Practice
When choosing high-risk and low-risk assets, you’ll go to the extremes of the spectrum. That means choosing both highly risky and no-risk investments for your portfolio. Ultimately, the hope is that your balance of assets will propel your portfolio forward in both good times and more turbulent economic times. Although you can use this strategy for stock investing, it’s usually employed by bond investors. Here is a look at how it works for both stocks and bonds:
- Stocks: Nassim Nicholas Taleb famously used this approach in the 2007-08 Great Recession and stayed ahead of the market. You can use this strategy for stock investing by choosing both speculative and blue-chip stocks in your portfolio. The split between the two is up to you.
- Bonds: The barbell strategy is most commonly used by bond investors. You’ll select a mix of high-quality and low-quality bonds to balance out your portfolio on both sides. But changing interest rates will have a big impact on your bond portfolio. With that, you’ll need to constantly monitor your bond investments to stay on track.
Pros and Cons of the Barbell Strategy
As with all investment strategies, there are some advantages and disadvantages to consider with the barbell option. It is important to be aware of both before making a decision so that you can factor in anything that may impact that decision. Let’s dive into the most relevant pros and cons of the barbell strategy
Barbell Strategy Pros
- Potentially higher returns: If your extremely high-risk investments pay off, you could see higher returns than a middle-of-the-road investor.
- Manage your risk: Selecting both investments with different amounts of risk can help you keep your overall portfolio risk lower.
- Diversity: You’ll have the ability to diversify your portfolio in different directions.
Barbell Strategy Cons
- Time-consuming: You’ll need to regularly monitor your portfolio to ensure that your investments are going further than you are comfortable.
- Not an intermediate timeline option: Typically, you’ll use this strategy as a long-term investor.
Who Should Consider the Barbell Strategy?
The barbell strategy, like most investing strategies, comes with some risk involved. In fact, many would argue that you’ll take on more risks than a middle-of-the-road investor with a portfolio of extremes if you decide to use it. However, the strategy makes sense as a way to minimize the threat of risk while chasing higher investment returns.
If the barbell strategy appeals to you, it’s a worthwhile option, but you’ll need to make sure you have the necessary time to commit to keeping up with your portfolio. Plus, you must have the stomach to bring extremely high-risk investments into your portfolio. Not all investors are ready for this extreme level of risk, even if it is balanced out by a very conservative portion of your portfolio.
A barbell strategy is an effective strategy for some investors. But it requires a lot of time and effort to maintain this portfolio of extremes. If you aren’t prepared to commit enough time, then you might do better with a more hands-off portfolio choice. In any case, it’s worthwhile to talk over this option with your financial advisor. They can help you sort out the details to make sure it’s the right fit for your financial goals and risk tolerance.
Tips for Investing
- A barbell investment strategy could be the right fit for your financial goals. But if you aren’t sure how to get started, then consider working with a financial advisor to make this option work for you. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- No matter what investment strategy you choose, the key is to get started as soon as possible. After you have an emergency fund in place and eliminate high interest debt, it’s time to dive into investing for your long-term financial goals. Explore how much your portfolio could grow with this free calculator.
- Not sure what asset allocation is best for your risk tolerance? Take advantage of this free asset allocation calculator to determine a solid allocation strategy based on the risks you are willing to take.
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