The Barbell strategy is an investment method that focuses the design of a portfolio on high and low risk assets. Look for balances between both investment profiles.
By taking a Barbell strategy, adaptation is sought by the individual or investor entity to the changes and volatility of the markets.
An investor who chooses to implement the Barbell portfolio methodology will pursue a certain level of breakeven.
In other words, you will base your portfolio on two parts differentiated by their level of exposure to market risks.
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This point is usually applied to the fact that the so-called medium risk zone is avoided, since positions with a high level of risk or a very low level of risk are held.
Creation of the Barbell strategy
At the end of the 20th century, the economic writer and popularizer Nasim Nicholas Taleb created this guideline applied to investment based on the principle of the unexpected.
Specifically, he stated that the existence of black swans is possible in a world in which white swans are considered unique.
Basically, Taleb assumed that there is always volatility in the markets, which can be used to obtain both profits in terms of investment and losses.
For this reason, it developed this economic concept that establishes portfolios with two very different parts and with different meanings.
Commonly this strategy, widely extended, is called dumbbell or hand weight.
How the Barbell strategy works
As indicated, this method is assimilated to a weight or dumbbell made up of a bar and two occupied ends.
In this way, a gap or imbalance is represented between two differentiated extremes and that represent two realities in an investment portfolio:
- Very risky profile. It responds to the most daring profile of the investor and with a greater probability of suffering volatility.
- Very low risk profile. This other profile is more cautious and tries to complete a portfolio with reliable assets that are not very susceptible to changes in the financial markets.
Financial Sense of the Barbell Strategy
Achieving a harmonious balance between both aspects can make it easier for the investor to achieve profitability both in volatile times of the economy (crisis, inflationary periods…) and in constant periods of the economic cycle.
In other words, in the face of possible financial disturbances, the portfolio will have sufficient reliability to continue obtaining profits.
In this sense, there are infinite possibilities when designing a portfolio with this approach. Although the combination of instruments such as fixed income (little volatile and with lower potential earnings) with other riskier or more volatile ones is common.
For this reason, it is the investor’s profile that must adapt their portfolio in the proportion that best suits their level of risk aversion.