Investing in the market over a long period of time has proven to do well. However, if you can beat the market for a long period of time the returns can be incredible. Beating the market doesn’t always mean being in the green. Sometimes you might be in the red, but if you are less red than the market, it’s a win. The barbell approach will do just this when there is red, and yield higher or equal returns when green.
What is the Barbell Approach
Everyone has their own outlook on what should be in a portfolio. A barbell approach just decides how the contents of the portfolio is balanced. The barbell approach I will discuss has three contents: Bonds/Dividend Focused investments, growth focused etfs and stocks, and sectors with big potential in the near future.
For those of you who are not gym rats, the diagram above shows a common barbell, a popular tool used to lift weights. On either side of the barbell, you need equal weight to ensure a proper lift. But don’t forget, the bar itself has some weight to it too. Once you properly balance out your weight, you are ready to lift!
The point of the barbell approach is to be able to secure growth when the market is good, and to be able to rebound faster than the market after a large market downturn. This type of downturn is one of more than 10% in a couple of days.
How the Barbell Approach Works
Bonds/Dividend Producers (40%): In this part of the barbell, you have investment vehicles you are strictly looking to collect from. If these assets go up, down, or sideways, you don’t really care. You are just looking at the quarterly or monthly payments you collect from them. Ideally, these assets will not be affected much by a downturn. A good dividend producer is the etf $DVY, which pays $3.73 annually in dividends. One can also buy High Rated Corporate Bonds such as AAA or AA, or anything BB and above. These bonds hold their strength against the market well and pay favorable coupon rates (monthly payment for holding the bond).
Growth Stocks/ETFs (40%): On the other side of the barbell, you play a riskier game. These investment vehicles you are in search of long capital gains from. This can be the market itself by investing in the S&P 500 ($SPY), or $SCHG, a large-cap growth etf, or in specific stocks that have passed the test of time. These might be Apple ($AAPL), Amazon ($AMZN), or Berkshire Hathaway ($BRK.A). Even when the market dips, these assets have proven to recover and rise higher.
Individual Sectors (20%): The previous two parts of the barbell approach are the weight on each side. This last part is the actual bar, which holds the added weight in place. The individual sectors you hold will be smaller percentages of your portfolio, and you will ideally hold them for less than a year. This part will consist of any specific sector you believe will have a good 6-12 months because of current economic conditions.
An example of this would be buying $ONLN when the pandemic first happened, because online retail was sure to rise since people couldn’t shop in stores, which it did. Now, someone practicing the barbell approach might sell their $ONLN, and buy $JETS, an etf which follows airlines.
How to Max Out the Barbell Approach
The saying never fails, “Everyone is a genius in a bull market.” You don’t need a strategy when everything is going up. When the market begins to slide is when having a proper strategy pays off. The growth side of the barbell will be hit pretty good when there is a dip. Instead of taking all the weight off when things go south, use the income from the other side to strengthen your position. If you are invested in confident assets in the growth area, they will recover, and you will have more money than before the drop. This is called Dollar Cost Averaging (DCA), a common investing practice. The money will still come in from the safe side, its just a matter of getting the barbell back even.
This method has proven success to keep pace with the market in good times. The true power of the strategy comes with how well it combats the bad times. If you fear market dips and are waiting to time the market, try this method right away instead.