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Highlights
- A barbell investment strategy involves striking a balance between reward and risk.
- It calls for making heavy investments in super safe assets and super risky investments so that they offset each other over time.
- The barbell strategy advises ignoring the mid-range of mildly risky assets.
You must have heard financial advisors talking about the barbell investment strategy. They call it one of the ideal ways to strike a balance between reward and risk. The concept of the barbell strategy is nothing but making heavy investments in super safe assets and super risky investments so that they offset each other over time. It calls for ignoring the mid-range of mildly risky assets.
The investment should look like barbell weights on graph. Thus, the barbell strategy followers believe that the way to earn best return on investment is to go to extremes in terms of asset allocation.
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Allocation of assets to an investment portfolio varies from person to person. While a young person may be more risk-tolerant, a retiree may seek a steady income. While a young investor might allocate 40% to speculative stocks such as initial public offerings (IPOs) and small biotech firms, 40% to blue-chip stocks, and 20% to debt, a retired individual might apportion 80% in bonds and 20% in blue chips.
What is a barbell investment strategy?
Advantages for stock investors
- The strategy balances risk and reward for stock investors.
- Unlike value investing, income investing, and growth investing, barbell investors don’t have to follow stringent requirements while picking stocks.
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Barbell investment strategy for bond investors
In case of fixed income investing, the strategy calls for mixing short-term bonds with long-term bonds. Thus, investors get protection due to long-term debt if bond yields decline and an opportunity to perform better in case of rise of short-term yields.
The ideal time for debt investors to employ the barbell strategy is when there are large gaps between short- and long-term bond yields.
Advantages for bond investors
- Investors can access higher-yield bonds.
- The strategy greatly lowers risk when employed at the right time.
Bottom Line
Even as the barbell strategy is beneficial to both stock and bond investors; the approach is seen to be quiet labour intensive demands frequent attention from investors. Before resorting to this strategy, investors must weigh all its facets and should not ignore the fact that it involves significant risk.
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