The Barbell Strategy in Equities

A strategy that invests in high- and low-risk assets while excluding more middle-risk assets. We are focusing our attention on the Barbell Strategy approach on stock investing.

What Is the Barbell Investing Strategy?

The Barbell strategy is one of the strategies to be used during extreme conditions. The purpose is, though, to maximize returns while minimizing risk by investing in high-risk and low-risk assets while excluding more middle-risk ones at the same time. Which means practicing super safe investment on one end and high-risk high-reward investment on the other.

It’s like having the best of both worlds. Heaven and Hell of investment

A portfolio using an evenly weighted approach would be 50% very conservative and 50% very aggressive. Usually, investors will construct their portfolios by using risk as their parameter. For example, an aggressive investor will invest in a high-risk asset while a conservative investor will invest in a low-risk asset.

In other words, you should choose investments that are both volatile and low-risk for your portfolio. I believe that, at the end of the day, what you hope is that the balance between your assets will be able to propel your portfolio forward both in times of prosperity and economic turmoil. This strategy was famously used by Nassim Nicholas Taleb back during the Great Recession (2007-2008) and managed to stay ahead in the market.

In this article, we will highlight how to implement this strategy solely using stocks, since this strategy usually uses a mix of bonds and stocks.

Implementation of Barbell Strategy on Stocks

By selecting both speculative and blue-chip stocks in your portfolio, you can use this strategy for stock investing. The split between the two is solely up to you. Unlike actual barbells, your portfolio doesn’t have to be weighted equally. You can be 80% aggressive and 20% conservative or 70% aggressive and 30% conservative or anywhere along the spectrum.

Speculative Stocks

In speculative investing, high-risk assets are purchased based on price fluctuations and hunches over solid fundamentals. It is frequently compared to gambling. An example of a modern investment is crypto, the stock of the metaverse, and angels and venture capitalists investing in unproven capability startups.

One of the best ways to invest in high risk is to check their volatility rate. On example is to check via Nasdaq 100 Volatility Index. Nasdaq 100 Volatility Index (VOLQ) measures 30-day index volatility.

Example of high volatility stocks.

Pinduoduo (PDD:NYSE)

Pinduoduo is a Chinese social media platform and e-commerce company that offers its Temu and Pinduoduo apps to over 900 million users and is one of the fastest-growing services on the internet. Currently, the company caters to both the North American market as well as the Chinese market.

In the past five year, the stock price has increase 266.75% between $23.21 and $195. In a shorter period of time, the stock price had increase up to 36.45%. Which this implement, that one can gain almost 37% by investing in the share for a year. Even if one decided to invest in a short term? The stock traded at $45 on the August 18 and and hit $71 on the August 31. Basically 57.78% increase in a span of 2 weeks.

High volatility give more room for investor to scoop for better return along several companies.

JD.com (JD:NYSE)

JD.com is another good example of a volatile Nasdaq stocks. As one of China’s largest e-commerce firms, the company operates a website similar to Amazon, where consumers can purchase products from some of the country’s top brands.

Furthermore, JD Logistics is the company’s logistics business, offering warehousing, fulfillment, and delivery services. Other companies owned and operated by JD include JD Health, JD Property, JD Industry, and Dada Group.

In the past year, the stock price has traded in the range of $33.17 to $81.24. The stock increase 17.66% in a span of 5 years while fell 22.83% in the past 12 months.

Blue Chip Stock

These stocks have a good track record of enduring tough market conditions and producing high returns in good market conditions. In simple terms, blue chip stocks are the most solid, and larger stocks you can buy. Most blue-chip stocks provide great dividends as their stock price stay at almost the same level. Thus, dividend is their investor’s interest driving factors.

Mastercard Inc (MA:NYSE)

One of a good blue-chip stock is Mastercard Inc. One of the largest payment-processing corporations worldwide along with Visa (V:NYSE). It offers a range of financial services such as global payments and a technology company that connects billions of consumers, thousand of financial institutions, and millions of businesses.

Their stock price only increases by 1.08% in the past 12 months. Their market dropped at the end of September due to the whole stock market dropped. Investors feared that a global currency and debt market meltdown could hobble the U.S. economy, forcing Wall Street to end sharply lower.

** The current TTM dividend payout for Mastercard (MA) as of January 06, 2023, is $2.28. The current dividend yield for Mastercard as of January 06, 2023, is 0.62%.

Read Blue Chip Stocks article in detail.

Unlike actual barbells, your portfolio doesn’t have to be weighted equally. You can be 80% aggressive and 20% conservative or 70% aggressive and 30% conservative or anywhere along the spectrum.

Your investment time horizon will determine how much emphasis you should place on wealth creation by investing in risky assets with high long-term returns, like stocks. The shorter your time horizon, the more emphasis you should give to wealth preservation by allocating to safe assets like high-quality, short-term bonds or money market accounts.

A conservative portfolio buffers downside risks.

While the aggressive side of the portfolio will fluctuate in wealth, while the rest of the conservative side remains relatively stable. By doing so, you will ensure that you have access to cash flow whenever you need it.

Why is this strategy important?

The aggressive side protects against the dual risks of inflation and longevity. Inflation will disrupt the monetary value. For example, the value of $100 today will not be the same value as $100 in the next 5 years.

For the 12 months ending December 2022, the United States had an inflation rate of 6.5%. This means, one needs to make more than 6.5% in order to retain the same monetary value while the risk of outliving your savings is one of the greatest risks in investing. These dual and important risks can be mitigated by realizing returns well above inflation over the long term.

Barbell Strategy Pros

High return potential: Higher risk, higher return. The possibility to have higher returns compared to invest mostly in middle risk.
Risk management: Include both investments with different levels of risk in your portfolio to lower your overall portfolio risk.
Diversity: Having a diverse portfolio will provide you with a higher level of risk management.

Barbell Strategy Cons

Time-consuming: The implementation of two different investments required more time. This is to make sure your investments are going in the direction that you desire.
Not immediate option: Typically, you’ll use this strategy as a long-term investor.

Bottom Line

A barbell investment strategy may be the right choice for you if you want to balance investment progression. Get started as soon as you can, regardless of what investment strategy you select.

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