What Is the Barbell Strategy?
Aggressively grow your portfolio while protecting your wealth
“Marry an accountant, but have occasional flings with rock stars.” – Nassim Nicholas Taleb, the man who made the term “barbell strategy” popular.
This quote sums up the spirit of the barbell portfolio. We’re looking for safety and stability with most of our portfolio (and life). But there’s nothing like the thrill that goes with making potentially life changing investments… Even if they end up destructive, like a fling with a rock star.
The barbell strategy divvies up our investment portfolio into two different sections on the extreme ends of the risk spectrum.
Section #1: Risk-Free Investments
Depending on your risk tolerance, this section should be 80% - 90% of your portfolio. These holdings should never go down in value. And should provide a nice income stream to live off… Like an accountant, these investments should be boring yet reliable. We don’t want any surprises in this section of our portfolio.
These holdings will be investments like savings accounts, treasury bonds, and investment grade corporate bonds. And if you want to move a little more up the risk curve you could throw rental real estate in this section.
Just collect stable, boring cash flows with this section. And it will preserve your lifestyle while safely allowing you to take risks with the other section of your portfolio.
Section #2: High Potential Investments
Then with the other 10% - 20% of your portfolio, you can buy investments that have the chance of doubling, tripling, or more over the next year. We need the high returns here to make up for the boring returns in section #1.
The goal here is to find what finance professionals call “asymmetric” investments. Asymmetric investments are that that have the potential to go up a lot more than they can go down.
Some investors try to find investments that could go down 10%, or up 20%. That’s kind of boring. We’re going to look for investments (or strategies) that could either go down 100% or up 1,000%.
Imagine buying bitcoin in 2011 when it was $1. A $1,000 investment then, if held onto today would be worth over $20 million. Life changing.
Now that’s an extreme example, but instructive. Those are the kinds of investments that allow this strategy to work.
The investments we’ll make here are in high-growth stocks, options, cryptocurrencies, venture investments, trading strategies, and more.
Here at Barbell Alpha, we’ll spend more of our time focused on investments and strategies at this end of the barbell. We’ll use these strategies to pump up your portfolio.
Avoid Average Investments
The problem with traditional wealth building strategies is that they usually entail a 50% drawdown in your wealth every 10 years or so. People who were fully invested in tech in 2000 saw those holdings drop 80%. Investors lost 50% in the market in 2008 drawdown. And anyone holding high-growth stocks for the past year into the summer of 2022 lost well over 50%.
Average stocks will give you average returns. Yet are vulnerable to large, sudden drawdowns. And these drawdowns are mentally tough to sit through. Many investors, even professionals, will end up selling as they watch their wealth deteriorate. It will feel like your portfolio is going to 0. That’s why you want to avoid these middle of the road investments.
Even the 60/40 portfolio (60% stocks and 40% bonds) that most wealth managers recommend is not guaranteed to give us returns. From 2000 - 2009, the 60/40 portfolio returned -3% after adjusting for inflation.
And in May 2022, the 60/40 portfolio was on pace to lose 49% for the entire year. Not the “safe” returns that are advertised.
With the barbell approach we should never lose more than 20%
Even in the worst performing markets. And hopefully you’ll have made enough uncorrelated bets that some went up when the markets plummeted.
Actually the times to make the biggest profits are when the market is going down. And if we’re watching closely, we can see opportunities to buy securities like puts. These are options on stocks that gain in value when the market goes down.
That’s the power of the barbell strategy.
And if you continue following along, together we’ll learn how to implement these strategies and grow our wealth.