Barbell Investment Strategy: you lift a lot of weights, then just go around making people give you money for retirement. It's also a legit strategy for investing in bonds.
You know how a barbell looks? Big heavy weights on either end with just a bar in the middle. That's the outline of the strategy.
First a bit about bonds. Bonds come with durations, basically representing how long they continue to pay out. So you might have a 2-year bond or a 10-year bond or 30-year bond, etc. You can roughly categorize these durations as short (less than 5 years), intermediate (in the 5-to-10-year range) or long (more than 10 years).
In a barbell strategy, you buy short duration and long duration bonds, but stay away from intermediate-term ones. The benefit of long-term bonds is that the interest rate is higher. Since it's a bigger risk waiting all that time, you get paid a higher rate in order to wait. Short-term bonds have a low payout, but they carry the least risk. You have some visibility over the near term, so the chances are much lower that something unexpected will happen and trigger a default.
The theory behind the barbell strategy is that intermediate bonds carry the worst of both worlds. The durations are too long for any real visibility, but the rates are below what you'd get for longer-term bonds. By mixing the short and long terms in your portfolio, you balance the risk/reward equation, the theory says, so there's no need to mess with the intermediate stuff.
Related or Semi-related Video
Finance: What are Systematic and Unsyste...14 Views
finance a la shmoop what are systemic and unsystematic risk systemic risks are
just endemic to the market want to invest in the stock market and compound [Plate of vegetable appear]
return your way into great wealth great but then you'll suffer the normal risk
of the system that risk specifically is this yeah best of times worst of times
but up over time the market goes up you just have to embrace the notion that [Man hugging a tree]
there is systemic risk in that in the short run you can buy an S&P 500 index
fund here then lose like a third or whatever of your money in not too many
years but if you don't panic and sell just at the wrong time here right out
the storm and keep going well then you should be just fine by the time you
arrive here so that's risk that is always in the system equities rise and [Equity in the ocean]
fall like the tides or something like that but generally they rise and if you
want to swim in this bathtub well you get used to the turbulence and have an [Girl swimming against the tide]
airsick bag handy all right that systemic risk or systemic risk
what's unsystematic risk well it's bad investors or rather bad investing it's
panicking and selling your stock just when you should be doubling down its
buying lousy companies thinking that they're cheap today but not realizing [Woman runs away from smelly girl]
that they will always be cheap because they're lousy or in a lousy industry or
run by lousy management it's buying into lousy industries that also look cheap
but are dying hello paper and pulp is yeah anyone really think that's gonna be [Paper printing]
around in 20 years all right well it's believing the dreamy hopes and prayers
of future earnings and trusting that there really will be 5 million [Traffic on the highway]
driverless cars on the road in 3 years you know good luck with that we'd love
it to be true but ain't gonna be unsystematic risk is also investing in
bonds for the long-term taking very little risk when taking little risk is
the opposite of what you should be doing when you're a young investor so yeah
systematic and unsystematic risk both exist plentifully and both can bite you [Dog bites portfolio from woman]
right in the portfolio so you got to know what both are and embrace them
for what they're worth
Up Next
What does it mean to rebalance an account, and will we need a yoga mat? Hit play to find out.
