Barbell Strategy: What Investors About "Dumbbell strategy" need to know

The barbell strategy is primarily used for bonds. But how exactly does the investment strategy work?

• Barbell strategy is primarily used for fixed-interest investments
• Barbell strategy enables good risk management, but involves a lot of work
• Jerry Gundlach relies on the barbell strategy and adjusts his portfolio recommendation

How does the barbell strategy work?

The barbell strategy is an investment strategy whose goal is to find a balance between risk and return, as US News explains. To achieve this, investments are made in both low-risk and high-risk investments. However, medium-risk options should be avoided with this investment strategy. Overall, the overall risk profile of an investor should be reduced while at the same time investing in high-risk and high-yield investments. As a rule, the strategy is used for fixed-interest investments. However, it can also be used on the stock markets. In fixed income investing, a barbell strategy can be used by purchasing short- and long-term bonds, but not medium-term bonds. Short-term bonds are safer than long-term bonds, but they also tend to have lower returns.

For bond investors, the barbell portfolio strategy can be quite effective if investors do not want to risk having too much of their capital tied up in long-term bonds. By holding a portion of their portfolio in short-term bonds, investors can set aside more cash to invest in new bonds. If interest rates fall, you still have the higher interest rates secured in long-term bonds. The barbell strategy is therefore largely dependent on interest rates. When interest rates rise, short-term bonds are routinely swapped for higher-yielding issues. When interest rates fall, longer-term bonds come into play because they have those higher interest rates locked in, Investopedia explains. The ideal time to apply the investment strategy is when there is a large gap between short-term and long-term bond returns.

Advantages and disadvantages of the barbell strategy

Arguably the biggest advantage of the barbell strategy is risk management. The balanced distribution between low-risk and high-risk investments makes it easy to control how much risk you take. The higher return is also positive. Because the risk can be easily minimized, investors do not have to forego higher-yielding investments in order to keep the risk of their portfolio low. However, this strategy also has disadvantages. The barbell strategy involves a lot of work. For it to work, you have to constantly monitor your portfolio – especially bonds – to keep up with interest rate changes. And the focus on bonds could also be interpreted as a disadvantage. Although the strategy can also be used with stocks, it is designed for fixed-interest securities. Finally, the lack of medium-term commitment can also be a disadvantage of the strategy, as US News explains.

Editorial team