What Is A Barbell Portfolio?

I think that the first thing is you should have a strategic asset allocation mix that assumes that you don’t know what the future is going to hold.

-Ray Dalio

A barbell portfolio divides investments up into a horizontal universe and cuts out the middle part. Imagine investments ranked along a rectangle shaped spectrum as shown below. Allocation percentage on the y-axis and maturities on the x-axis:barbell bond portfolio graph

The concept is most easily understood by using the example of a bond only portfolio. Short term bonds are often considered risk free or low in risk and the barbell portfolio loads up on these. The middle maturities are avoided but to make up for the yield the barbell portfolio misses out on in the middle, it loads up again on long maturity bonds. Long maturity bonds are the most risky but also offer the highest returns.

The general idea is to avoid risk as completely as possible with one end of the barbell portfolio and embrace it on the other end.

CFA Clifford Dow did a lot of work on barbell portfolios combining cash and common stock which is one alternative to a 60/40 stock/bond portfolio:

wpe6.jpg (49134 bytes)

Image: Dow

You generally need to allocate a little bit more towards stocks to keep up with the 60/40 portfolio.

The way I put the barbell portfolio into practice is by maintaining a “cash like” allocation and combine that with generally very aggressive stocks. I avoid the Proctor & Gambles of the world and seek out very small companies that can experience lots of volatility and often lack liquidity.

In the portfolios I run within The Black Swan Portfolio service, this has worked out so far. The aggressive portfolio – or side of a barbell – displayed quite a high annualized return:


While the safe portfolio – or the safe side of a barbell – returned something close to a bond portfolio.


Both portfolios are running quite a bit above my long term expectations but it’s clear these aren’t middle of the road portfolios returning 5% and 7%.

It’s also possible to have the safe portfolio run at a negative return. Sometimes that’s necessary in order to be truly safe. I’ve loaded up the portfolio on short term inflation protected bonds and mixed in lots of different assets that I expect to be fairly uncorrelated and continue to think of ways to make it safer.

My goal is for the safe side to offer protection even under the most adverse of circumstances. If there’s been a Hollywood movie about it, the Numeraire should still be able to hold its own: think viral outbreaks, nuclear threats, floods, hyperinflation, windstorms, WO III, another 1929 or zombie hordes. Ok, the last one is somewhat tongue in cheek but you can read it as “other unexpected threats”.

Obviously, even short term treasuries with inflation protection won’t do well under some of these circumstances but there are small allocations towards gold miners with production costs exceeding the current gold price that should deliver such outsize returns during mass panics it makes up some of the shortfall. Meanwhile, the cost of carry is limited due to the small position sizes.