What Is a Barbell Investment Strategy?

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Quick definition: When investors buy two assets with opposite risk/reward qualities.

The reason one would do this: Multiple factors are making it unclear whether safer but lower yielding assets will outperform riskier assets with more potential or vice versa, so investors want exposure to both.

So wouldn’t one cancel out the other, you might think? Maybe, but it depends on the environment. This year, we’ve seen different forms of barbell strategies play out in the market. Before we analyze, let’s go over the different forms first.

In one’s broader portfolio of assets — maybe your wealth accounts with your advisors — you hold a lot stocks, but also a lot of safe treasury bonds. That’s a barbell, in which you are holding assets with a historically opposite price correlation to each other.

Or maybe you do your own stock picking on a trading platform. Maybe you are buying high-growth tech names that aren’t necessarily tied to the economic cycle, but you’re also buying lower growth value stocks that will rise and fall with the economy. You could be buying defensive stocks like consumer staples, which are stable through economic expansions and busts, but also cyclical stocks like oil, which are highly economically sensitive.

Let’s go back a few months. In first quarter, when the pandemic struck, the Federal Reserve had to drastically lower interest rates in order to enable people and businesses liquidity in order to rebound after lockdowns end. Well, that means stock prices were rising in part because safe treasury bond prices were rising (interest rates fall as prices rise). Plus, many investors were cautious on the speed of the economic recovery, so while they wanted to be exposed to stocks, they wanted downside protection by holding treasures, whose price was bound to remain somewhat elevated anyway, as the Fed keeps rates low.

Recently, Bank of America global Research has pointed out that many investors are using a growth versus value barbell strategy. Why? Value stocks have a lot to gain, especially if the recovery continues with strength and some of these stocks do not have much downside because they have already underperformed. 

Meanwhile, even though growth tech stocks like the FAANG group have run into some valuation concerns, their long-term outlooks are still very promising. Why not hold stocks that flourish in a recovering economy as well as those that power ahead selling new services like e-commerce or cloud services?

Happy investing. 

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