Investors often get classified as conservative or aggressive.
Conservative investors are typically those who hold cash in CDs and savings accounts or buy relatively low-risk bonds. They’re risk-averse to speculative investments. In contrast, aggressive investors keep their money in high-risk assets like stocks and ETFs.
The barbell investment strategy strikes a balance between the two extremes.
Read on to understand the origins of barbell investing and how you can add this approach to your saving strategy.
What is the barbell strategy approach to investing
Conventional financial planning focuses on age and number of years to retirement to construct investment strategies.
Younger investors typically take on more risk, with portfolios using a mix of speculative, blue-chip stocks and ETFs. Older investors generally decrease stock exposure the closer they get to retirement. They invest in more conservative producties (like annuities and dividend stocks), with most of their portfolio — often up to or around 80% — in bonds and risk-free investments such as CDs or straight cash.
The barbell investment strategy avoids the middle of the risk spectrum, forming the basis of a barbell portfolio strategy. A barbell portfolio invests in two extremes: ultra-safe investments and highly speculative, often leveraged investments.
Nassim Nicholas Taleb — a statistician, derivatives trader, and author of The Black Swan — popularized the barbell strategy. While many traders lost big during the 2007–2008 financial crisis, Taleb’s approach helped him succeed.
He considers the middle of the investing risk continuum too risky with minimal potential for reward. So Taleb advocates for keeping 90% of your money in super-stable assets such as cash and government-backed treasuries, and 10% in highly speculative assets like options and cryptocurrency. In his 2012 book Antifragile: Things That Gain from Disorder, Taleb described this approach as “antifragile.”
Taleb thinks of the world as disorderly and unpredictable — full of unexpected and high-impact Black Swan events. He applies the barbell investment strategy to benefit from the things that bring other investors down. You take on minimal risk with so much of your portfolio in safe investments, but that 10% has the potential to deliver outsized upside.
How the barbell strategy works in bond investing
Initially a fixed-income investing tactic, a barbell approach to bonds invests in two extremes: low-risk, low-return, short-term bonds of 1–3 years, and riskier, higher-yielding long-term duration bonds of 10+ years.
The barbell approach to bonds addresses rising and falling interest rate environments. When interest rates increase, bond investors don’t have to wait long to reinvest in short-term bonds with new, higher yields. And when interest rates decrease, you’re locked into long-term bonds, which will increase in value. Long-term bonds offer higher yields to begin with to offset the possibility of rising rates.
Short-term bonds tend to perform well when long-term bonds don’t, and vice versa. They’re non-correlating assets that help lower overall portfolio risk.
Applying the barbell strategy to stock investing
You can also apply a barbell approach to stock investing — how you do so depends on your perspective.
Some investors might consider the two extremes to be blue-chip, dividend-paying stocks on one end and the most aggressive technology stocks known as the Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla) on the other.
For the dividend stock allocation, these investors might only purchase dividend aristocrats — companies that have increased their dividend payment annually for at least 25 consecutive years. Many dividend investors consider aristocrats the cream of the crop. These stocks include household names such as Lowe’s and Coca-Cola and lesser-known companies such as Genuine Parts and Nordson. This class of stocks offers consistent income via dividends and price stability relative to the more volatile technology names.
Other investors might only purchase dividend stocks with dividend increase streaks of 50 years or more (dividend kings). It doesn’t get any more blue-chip than this, taking an even more risk-averse approach. Then, to the other extreme — the other end of the barbell — these investors might only buy IPOs (initial public offerings).
IPOs are the first chance for investors to purchase shares of formerly private companies (startups) on the public market. These stocks usually experience more initial market volatility, rising and falling rapidly before settling post-IPO. Compared to well-established corporations like Apple and Amazon, these companies are young and lack a track record that breeds the same confidence level.
These are just a few of the ways you could use the barbell strategy in your stock investments. On one extreme, you can go from less risky with dividend aristocrats to least risky with dividend kings. Alternatively, you can go with the risky Magnificent 7 or even riskier IPOs.
Of course, stocks don’t always perform how we think they will. You can lose money in dividend payers and buy an IPO that trades like a conservative stock. Worth keeping that in mind.
The barbell strategy vs. the bullet strategy
If you’re a more passive investor, you might prefer the bullet strategy to the barbell strategy.
Unlike barbell bond investing, the bullet strategy requires buying bonds that mature simultaneously. So, there’s no matching of short and long-term bonds and frequent reinvesting as short-term bonds mature. Instead, you sit back and do nothing, irrespective of what’s happening with interest rates.
The bullet strategy exposes you to interest rate risk and concentration risk. It’s an even less diversified approach than the barbell strategy, which at least includes different types of investments to create the albeit extreme whole. However, a bullet strategy is easy to execute and gives you a strong sense of what to expect and when, which can be helpful if you need your money for a foreseen event.
Is the barbell strategy right for you?
Some barbell strategy advocates apply the strategy broadly. For example, you might work a predictable 9–5 job with benefits and a consistent salary. At the same time, maybe you aggressively follow your passion to be a YouTuber. The formal job gives you stability, while the YouTube side hustle could be lucrative if it takes off.
So, if you like the idea of prioritizing safety and security while still dabbling in risk to potentially earn more, a barbell strategy is a great approach.
This said, the barbell strategy isn’t traditionally diversified. It doesn’t follow the usual investing advice based on your age or stage in life — so it might feel less familiar and unconventional compared to standard financial planning.
Applying the barbell investment strategy to annuities
Gainbridge offers several annuities with guaranteed interest rates that beat what you’ll get with a CD, a high-yield savings account, bonds, and U.S. treasuries. Annuities are relatively conservative financial products, making them a great solution for your 90% safe investing strategy.
Get in touch with an annuity professional today to discuss how annuities can fit into your investment plan.
This article is for educational and informational purposes only and should not be interpreted as investment, tax, or legal advice. You should consult your own advisor for tailored information.
Annuities issued by Gainbridge LIfe Insurance Company located in Zionsville, Indiana.
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