“If you line 1000 people up and take the person who weighs the most in the world, that person will represent thirty basis points of the total (0.30% of the total);
If you take 1000 people and measure how the wealthiest person fare in the real world, you will be astonished that person will represent 99.9% of the total.”– Nassim Nicholas Taleb. Renowned derivatives trader and arbitrageur
The barbell investment strategy advocates pairing two distinctly different baskets of investment assets – distributing between the two extremes with almost nothing in the middle. One basket holds extremely safe investments, while the other highly speculative or leveraged investments. In other words, this strategy urges investors to stay as far from the middle as possible.
So instead of your portfolio being mildly conservative or aggressive, it is both hyper-conservative AND hyper-aggressive at the same time. By doing so, it could potentially limits your downside risk—the total amount you could possibly lose — yet expose you to potentially unlimited upside.
Taleb suggests allocating 85% to 90% in ultra-safe investments. The remaining 10% to 15% could be allocated in small, speculative assets — basically, the highest risk-reward investments possible.
Here is an example to what a barbell portfolio could look like like:
This unusual approach famously used by renowned derivatives trader and arbitrageur Nassim Nicholas Taleb allowed him not just to survive but substantially profit during the 2007 and 2008 economic downturn. Many of his fellow Wall Street counterparts took hits and sunk instead. Taleb described his version of the barbell strategy’s underlying principle as follows:
“If you know that you are vulnerable to prediction errors, and accept that most risk measures are flawed, then your strategy is to be as hyper-conservative and hyper-aggressive as you can be, instead of being mildly aggressive or conservative.”
The hyper-conservative portfolio should at least try to beat the inflation rate or close to it. With this safely in the pocket, the hyper-aggressive portfolio is just waiting for its turn to shine.
Actually, we are subconsciously applying barbell strategy in our everyday life.
Family Time. Avoid distractions when spending time with your family. Spend your undivided attention with your kids for a day, and perhaps work for the entire next day without seeing them at all.
Work. Avoiding working in a fragmented manner all day. Work in short, intense bursts and relax all day after finishing work.
Gambling. Avoiding betting in a incoherent or illogical way. Lay down on some specifc bets with low probability, but spread the majority of your bets on outcomes with higher probability.
By applying the same strategy in our investment, logically, could we not attain the same positive outcome in life that we are aiming for?