Barbell Investing Strategy?

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Gilberto de Piento
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Barbell Investing Strategy?

Post by Gilberto de Piento » Tue Jul 24, 2018 8:45 am

Is anyone using a barbell strategy in their investing? https://en.wikipedia.org/wiki/Barbell_strategy

For example, putting 90% of your assets in something considered reliable like dividend stocks or rental housing, and 10% in something risky like cryptocurrency or private equity?

Does it only make sense if the 10% is in something with a huge potential upside?

trailblazer
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Re: Barbell Investing Strategy?

Post by trailblazer » Tue Jul 24, 2018 1:01 pm

Not formally but I'm intrigued by the idea and curious what others might be doing.

For now, most of my portfolio is fairly "standard" with about 10% total devoted to speculation:
- a couple of microcap stocks that have caught my attention
- crypto
- I'm maintaining 1% of my net worth in out-of-the money S&P 500 call options - almost always they bleed to zero but if the market makes a jump they will pay off significantly . . . only needs to work once or twice and I'll be happy.

I've thought that if I ever have a truly large net worth I will put 80% in a permanent portfolio and speculate with the other 20%.

jacob
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Re: Barbell Investing Strategy?

Post by jacob » Tue Jul 24, 2018 1:14 pm

Gilberto de Piento wrote:
Tue Jul 24, 2018 8:45 am
Does it only make sense if the 10% is in something with a huge potential upside?
Yes, and also only if the 90% is in something with almost no downside (so not dividend stocks or rentals). The 10% is supposed to drive the return of the full portfolio, so you're looking a 10-baggers. OTOH, you can never lose more than 1/10th of your portfolio.

jennypenny
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Re: Barbell Investing Strategy?

Post by jennypenny » Tue Jul 24, 2018 1:35 pm

I think I would aim for keeping 90% in as safe an investment as you can (I'd probably pick treasuries) and then aim to cover all expenses instead of swinging for the fences with the other 10%. It wouldn't be a runaway, but I'd be happy with it.

frommi
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Re: Barbell Investing Strategy?

Post by frommi » Tue Jul 24, 2018 2:15 pm

I do something similar since some years now, 95% of my assets are in dividend growth and netnet stocks and ~5% in bear put spreads on the DAX, but only for the summer months. The put spreads are 7-8 baggers when the DAX has a 20% drawdown, which happens every 4-5 years. Its like moving a 5% return from the good years and get 35% back when the market corrects, where i can than scoop up the bargains.

At least in my backtests i would have survived all the major crashes in the last 100 years without large drawdowns (i think max was around 15-20%) and returns are roughly 3-4% higher than a 100% stock portfolio. This is because nearly all major stock market corrections happened from may to october. Maybe in the future this pattern changes, but i am willing to take that bet.

Mister Imperceptible
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Re: Barbell Investing Strategy?

Post by Mister Imperceptible » Tue Jul 24, 2018 4:24 pm

90% gold
10% put it on double zero and spin the roulette wheel

Rebalance annually.

jennypenny
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Re: Barbell Investing Strategy?

Post by jennypenny » Tue Jul 24, 2018 4:41 pm

@MI--If that's your strategy, make sure you play on a cruise ship where it's a little easier to predict which numbers are more likely to come up. ;)

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Tyler9000
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Re: Barbell Investing Strategy?

Post by Tyler9000 » Wed Jul 25, 2018 9:14 am

I've seen the term "barbell" refer to two different ideas in investing. The first is in reference to investing in equal parts short and long term bonds where you're buying the barbell along the maturity curve. Your question implies the second, which is more about taking risks with a small amount of your money and balancing that with large percentages of safe assets. People also sometimes talk about that in terms of risk parity.

I think both have merit. The bond barbell is a classic Permanent Portfolio concept, while volatility risk parity is a signature feature of the Larry Portfolio.

ThisDinosaur
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Re: Barbell Investing Strategy?

Post by ThisDinosaur » Thu Jul 26, 2018 8:10 am

Taleb's books are the first place I read about the Barbell Strategy. I don't know if he invented the term, but he uses the Kelly Criterion as one of the examples of implementation. He also somewhere said that Treasuries are *not* a safe asset. The definition of a Black Swan is a thing happening that most assume was impossible. Like treasuries failing after you've put 90% of your money there for "safety."

Dream of Freedom
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Re: Barbell Investing Strategy?

Post by Dream of Freedom » Thu Jul 26, 2018 8:23 am

You could also buy 100% bonds and use the income to buy calls or puts on stock.

Mister Imperceptible
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Re: Barbell Investing Strategy?

Post by Mister Imperceptible » Thu Jul 26, 2018 8:53 am

Can you really feel safe with Treasuries?

viewtopic.php?f=3&t=9903&start=40#p171258

ThisDinosaur
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Re: Barbell Investing Strategy?

Post by ThisDinosaur » Thu Jul 26, 2018 9:18 am

+1 Dream of Freedom
That strikes me as a good barbell strategy. Except I'd add that it should be internationally diversified corporate bonds in different currencies. That way you have individual income contracts with multiple different entities in multiple different currencies.

Its the Libertarian thing to do as well, because you are in a contractual agreement with businesses instead of governments who can fudge the value of the IOUs.

Anyway, the main feature of the Barbell idea is to avoid anything with medium risk. That's why Swedroe's Larry portfolio (Tyler linked above) is a good example. It pairs historically volatile asset classes with historically non-volatile ones. The PP is a good suggestion too, but I'd argue that replacing TSM with Small Cap Value would fit the bill better, because you want the high beta.

Mister Imperceptible
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Re: Barbell Investing Strategy?

Post by Mister Imperceptible » Thu Jul 26, 2018 9:42 am

@ThisDino

But corporate bonds don’t insulate you from governments fudging IOU values. Unless Apple, Amazon, and Alibaba come up with their own currencies. :P

How did corporate bonds do in 2008?

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Re: Barbell Investing Strategy?

Post by jacob » Thu Jul 26, 2018 9:56 am

@DoF - No ... that's essentially using the put-call parity relation (continuously arbitraged) to establish a synthetic position that's essentially the stock market itself.

Roughly (abusing the math notation here), this always holds: C-P=S-K, where C and P are the call and put price, respectively, S is the price of the stock[market] and K is the price of the bond that financed it. So, by this it follows that

S=K+C-P ...

IOW, if you own a bond and spend the interest on buying calls and selling puts, you will exactly math the stock market complete with volatility. You can remove one of the legs for a different payout profile. If you stop selling puts, you would no longer lose money when the market goes down. OTOH, you will lose the money stream from writing them. If done diligently, this will cut volatility in half ... but it will also cut returns in half.

ThisDinosaur
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Re: Barbell Investing Strategy?

Post by ThisDinosaur » Thu Jul 26, 2018 10:48 am

@Jacob
I took DoF's suggestion to mean investment grade bonds paired with options on completely different firms. Does that use of put-call parity still apply?

@MI
You're not wrong. But many (most?) of the corporate bonds that dropped in price kept paying their coupons, and then recovered.

Dream of Freedom
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Re: Barbell Investing Strategy?

Post by Dream of Freedom » Thu Jul 26, 2018 10:58 am

@jacob

Maybe I should have been more clear. I was suggesting using technical analysis to make a directional bet on individual stocks. Completely a Delta trade. You'd have to find a stock with strong momentum either way and be a decent technician though.

wolf
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Re: Barbell Investing Strategy?

Post by wolf » Tue Jan 01, 2019 3:52 am

Here is an example of it: https://thedeepdish.org/advanced-invest ... -strategy/
I thought about implementing the Barbell Strategy.
My current portfolio AA looks like this:
- 40% Bonds (emerging/developed markets, government and corporate)
- 60% Stocks (emerging/developed markets, small/big)
...so pretty diversified and "safe" in my opinion.

I thought about adding some speculative investments, like commodities and allocate it with 10% or so.
It would be not that speculative, but it could also deliver high returns during the next 10 years.

arcyallen
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Re: Barbell Investing Strategy?

Post by arcyallen » Sun Jan 06, 2019 8:11 am

I've always thought of the Barbell Strategy as a smart sounding dumb strategy. I have not used it. I think the only real benefit to it is to scratch the itch of playing games with investing. I liken it to making $1k a week in income and "only" spending $10 of it on lottery tickets each week.

I also think that it helps you play some mental deception games with yourself. You'll likely forget the slow bleed of losing 10% here and there, but you'll definitely remember the 300% gain you had that one time. Fun, but I just can't see a consistent financial benefit.

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