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79. Barbell Strategy by Nassim Nicolas Taleb - Management of Investments

Updated: Jun 25, 2020

What Is a Barbell Strategy? Barbell Strategy Applied To Business

A Barbell strategy consists of making sure that 90% of your capital is safe, and use the remaining 10%, or on risky investments. Applied to business strategy, this means having a binary approach. On the one hand, extremely conservative. On the other, extremely aggressive, thus creating a potent mix.

I. Barbell Strategy

A Barbell strategy consists of making sure that 90% of your capital is safe, by investing it in Risk-Free assets, which cover from inflation. On the other hand use 10%, or the remaining capital for very risky investments.

Few people can coin a new word, and one of those is the options trader, writer, and philosopher Nicholas Nassim Taleb. He introduces the concept of Black Swans and how to deal with that in his three books series called “Incerto.”

Before men discovered the existence of Black Swans in Australia, empirical evidence showed that they did not exist.

Pic : Nassim Nicolas Taleb

The problem with empirical evidence is that it can only be falsified rather than prove to be right or wrong ultimately. In other words, there will be not a final theory in science, or in socio-economical life, that will be right forever.

Instead, a method that works better compared to the previous ones. Until a new, evolved theory, therefore falsify a previous one. It does not mean that the former assumption was wrong, but rather not as complete as the new theory.

What does this introduction have to do with investing? The investing world is plenty of gurus, which affirm to be able to read the markets.

The problem is that this is not possible, not because they are not knowledgeable enough but somewhat because they are too indoctrinated with their theories and, therefore, they fall into the narrative fallacy. The narrative fallacy is a bias that we all carry, but that the so-called “experts” seem to carry the most.

In other words, we tend to give an explanation and create cause-effect relationships between events, which are not related at all. In short, with words we can create stories, those stories fit a narrative, which is deviant from reality.

Also, while experts in the domain of physical things, may be really able to have a better understanding of that domain, this is not the case for social areas.

As Taleb puts it,

“if you put 1000 people in line and you 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);” instead, if you take 1000 people and you want to measure how the wealthiest person in the world will affect the total, you will be astonished to see that person representing 99.9% of the total.

II. Mediocristan vs. Extremistan

In other words, Taleb classifies our world in two domains, a first domain, called Mediocristan, like the weight example. And a second domain, called Extremistan, like the wealth example.

In the weight example (mediocristan), one single rare event minimally impacts the total. In the wealth example (extremistan), instead, one single rare event will make the total. From here, we go back to our idea of black swans.

Socio-economics is classifiable as an extremistan domain, where one rare event can make the total. Therefore, the problem here is to understand the difference between rare events, or “Black Swans” which can be classified in “Positive Black Swans” and “Negative Black Swans.”

In other words, we want to avoid negative black swans, while we want to completely expose ourselves to positive black swans. But how does this concept apply to finance and investments?

To take advantage of positive swans while avoiding negative ones, you have to take an opposite approach in the same domain. In short, you want to cover yourself from blowups while also making yourself exposed to unlimited upsides.

III. The barbell strategy

This strategy translates into the Barbell strategy, elaborated by Taleb. This strategy mainly consists of making sure that 90% of your capital is safe, by investing it in Risk-Free assets, which cover from inflation. On the other hand use 10% of the remaining capital for very risky investments.

Pic : For Individuals

Risky investments such as options, or rights but not obligations to either buy or sell a stock in the future. The cool thing about options is the fact that you know the downside beforehand (the cost of the option), although, you don’t know the upside (as Taleb puts it “The sky is the limit”).

While this strategy can be used in investing, it can also be used in other domains of life. The interesting theory coming from Taleb’s book is intriguing since it can be expanded to the point of making yourself “antifragile” to life.

This new word coined by Taleb differs from robustness. Indeed, while robust things are resistant, “antifragile” things, gain from disorder. In an uncertain, extremistan world, becoming antifragile can be the answer and solution to life’s meanest problems.

IV. What Is a Barbell?

The barbell is an investment strategy applicable primarily to a fixed-income portfolio. Following a barbell method, half the portfolio contains long-term bonds, and the other half holds short-term bonds. The “barbell” gets its name because the investment strategy looks like a barbell with bonds heavily weighted at both ends of the maturity timeline. Its about a large number of short-term holdings and long-term maturities, but little or nothing in intermediate holdings.

Understanding Barbells

The barbell strategy will have a portfolio consisting of short-term bonds and long-term bonds, with no intermediate bonds. Short-term bonds are considered bonds with maturities of five years or less while long-term bonds have maturities of 10 years or more. Long-term bonds usually pay higher yields—interest rates—to compensate the investor for the risk of the long holding period.

However, all fixed-rate bonds carry interest rate risk, which occurs when market interest rates are rising in comparison to the fixed-rate security being held. As a result, a bondholder might earn a lower yield compared to the market in a rising-rate environment. Long-term bonds carry higher interest rate risk than short-term bonds. Since short-term maturity investments allow the investor to reinvest more frequently, comparably rated securities carry the lower yield with the shorter holding requirements.

V. Asset Allocation With the Barbell Strategy

The traditional notion of the barbell strategy calls for investors to hold very safe fixed-income investments. However, the allocation can be mixed between risky and low-risk assets. Also, the weightings—the overall impact of one asset on the entire portfolio—for the bonds on both sides of the barbell don't have to be fixed at 50%. Adjustments to the ratio on each end can shift as market conditions require.

The barbell strategy can be structured using stock portfolios with half the portfolio anchored in bonds and the other half in stocks. The strategy could also be structured to include less risky stocks such as large, stable companies while the other half of the barbell might be in riskier stocks such as emerging market equities.

1. Getting the Best of Both Bond Worlds

The barbell strategy attempts to get the best of both worlds by allowing investors to invest in short-term bonds taking advantage of current rates while also holding long-term bonds that pay high yields. If interest rates rise, the bond investor will have less interest rate risk since the short-term bonds will be rolled over or reinvested into new short-term bonds at the higher rates.

For example, suppose an investor holds a 2-year bond that pays a 1% yield. Market interest rates rise so that current 2-year bonds now yield 3%. The investor allows the existing 2-year bond to mature and uses those proceeds to buy a new issue, 2-year bond paying that returns the 3% yield. Any long-term bonds held in the investor's portfolio remain untouched until maturity.

As a result, a barbell investment strategy is an active form of portfolio management, as it requires frequent monitoring. Short-term bonds must be continuously rolled over into other short-term instruments as they mature.

The barbell strategy also offers diversification and reduces risk while retaining the potential to obtain higher returns. If rates rise, the investor will have the opportunity to reinvest the proceeds of the shorter-term bonds at the higher rates.

The short-term securities also provide liquidity for the investor and flexibility to deal with emergencies since they mature frequently.

2. Pros and Cons


  • Reduces interest rate risk since short-term bonds can be reinvested in a rising-rate environment

  • Includes long-term bonds, which usually deliver higher yields than shorter-term bonds

  • Offers diversification between short-term and long-term maturities

  • Can be customized to hold a mix of equities and bonds


  • Interest rate risk can occur if the long-term bonds pay lower yields than the market

  • Long-term bonds held to maturity tie up funds and limit cash flow

  • Inflation risk exists if prices are rising at a faster pace than the portfolio's yield

  • Mixing equities and bonds can increase market risk and volatility

3. Risks From the Barbell Strategy

The barbell strategy still has some interest rate risk even though the investor is holding long-term bonds with higher yields than the shorter maturities. If those long-term bonds were purchased when yields were low, and rates rise afterward, the investor is stuck with 10-30-year bonds at yields much lower than the market. The investor must hope that the bond yields will be comparable to the market over the long term. Alternatively, they may realize the loss, sell the lower-yielding bond and buy a replacement paying the higher yield.

Also, since the barbell strategy does not invest in medium-term bonds with intermediate maturities of 5-10 years, investors might miss out if rates are higher for those maturities. For example, investors would be holding 2-year and 10-year bonds while the 5-year or 7-year bonds might be paying higher yields.

All bonds have inflationary risks. Inflation is an economic concept that measures the rate a basket of standard goods and services increases over a specific period. While it is possible to find variable-rate bonds, for the most part, they are fixed-rate securities. Fixed-rate bonds might not keep up with inflation. Imagine that inflation rise by 3%, but the bondholder has bonds paying 2%, in real terms, they have a net loss of 1%.

Finally, investors also face reinvestment risk which happens when market interest rates are below what they were earning on their debt holdings. In this instance, let's say the investor was receiving 3% interest on a note that matured and returned the principal. Market rates have fallen to 2%. Now, the investor will not be able to find replacement securities that pay the higher 3% return without going after riskier, lower credit-worthy bonds.

4. Real-World Example of Barbell Strategy

As an example, let's say an asset allocation barbell consists of 50% safe, conservative investments such as Treasury bonds on one end, and 50% stocks on the other end.

Why a Barbell Income Strategy May Help Late in the Cycle

Earning income without taking excessive risk is a balancing act—and it can be hard to pull off in the late stages of a credit cycle. A credit barbell strategy can help investors stay on their feet.

A credit barbell combines high-yield corporate bonds and other credit assets with high-quality government debt. Because the returns of these two asset types are usually negatively correlated, pairing them can be a good way to generate income while limiting

A generic risk-weighted barbell consisting of 65% US Treasuries and 35% US high-yield bonds would have held up well in most market cycles over the last 20 years, often besting the Bloomberg Barclays US Aggregate Bond Index and its peer group in the Morningstar Intermediate Core-Plus category.

That’s especially important during the later stages of a cycle, when the risks associated with income-oriented strategies increase. In some cases, a barbell has produced superior returns in such circumstances. In others, it has delivered downside protection.

Pinpointing the start and end of the late cycle period is difficult. For this display, we defined it as coterminous with the last three Federal Reserve interest-rate hiking cycles. For example, on June 30, 2018—more than two years into the Fed’s recent tightening campaign and with Treasury yields having risen sharply—12-month rolling returns for a generic barbell strategy would have been 0.5%. Its peers and the Aggregate delivered negative returns in that period.

Keep in mind that the weightings in this generic barbell are static. In practice, investors might adjust the balance as conditions and valuations change—for example, by shifting away from interest-rate risk and toward credit as the Fed’s tightening campaign winds down. This dynamic approach can increase income and return potential. That’s likely to be important now that we expect the Fed’s next move will be to cut rates.

About Nassim Nicholas Taleb

Nassim Nicholas Taleb spent two decades as a risk taker before becoming a full-time essayist and scholar focusing on practical and philosophical problems with chance, luck, and probability. His focus in on how different systems handle disorder.

He now spends most of his time in the intense seclusion of his study, or as a flâneur meditating in cafés. In addition to his life as a trader he spend several years as an academic researcher ( Distinguished Professor at New York University's School of Engineering, Dean's Professor at U. Mass Amherst). He is the author of the Incerto (latin for uncertainty), accessible in any order (Skin in the Game, Antifragile, The Black Swan, The Bed of Procrustes, and Fooled by Randomness) plus a freely available technical version, Silent Risk. Taleb has also published close to 55 academic and scholarly papers as a backup, technical footnotes to the Incerto in topics ranging from Statistical Physics and Quantitative Finance to International affairs. The Incerto has more than 150 translations in 39 languages. Taleb believes that prizes, honorary degrees, awards, and ceremonialism debase knowledge by turning it into a spectator sport. ""Imagine someone with the erudition of Pico de la Mirandola, the skepticism of Montaigne, solid mathematical training, a restless globetrotter, polyglot, enjoyer of fine wines, specialist of financial derivatives, irrepressible reader, and irascible to the point of readily slapping a disciple."

----La Tribune (Paris) " A giant of Mediterranean thought ... Now the hottest thinker in the world,..."

-----London Times "The most prophetic voice of all"



Key Takeaways :

  • The barbell is a fixed-income portfolio strategy where half of the holdings are short-term instruments, and the other half have long-term holdings.

  • The barbell strategy allows investors to take advantage of current rates by investing in short-term bonds and get higher yields of holding long-term bonds.

  • The barbell strategy can also mix stocks and bonds.

  • There are several risks associated with using a barbell strategy.

Assume that market sentiment has become increasingly positive in the short term and it is likely the market is at the beginning of a broad rally. The investments at the aggressive—equity—end of the barbell perform well. As the rally proceeds and the market risk rises, the investor can realize their gains and trim exposure to the high-risk side of the barbell. Perhaps they sell a 10% portion of the equity holdings and allocate the proceeds to the low-risk fixed-income securities. The adjusted allocation is now 40% stocks to 60% bonds.

In Nutshell, Barbell Strategy is Management of Investment with Optimum Results and Moving the People to " Antifragility " Statein stead of Robust State.

In an uncertain, extremistan world, becoming antifragile can be the answer and solution to life’s meanest problems.

This Barbell Strategy is the better Investment Solution to the Most of the Normal Investors in Daily Life...!!

MM Rao


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