Apr 9, 2022 5 min read

”I will never get to know the unknown since, by definition, it is unknown. However, I can always guess how it might affect me, and I should base my decisions around that.”

- Nassim Taleb

The “barbell strategy” has gained popularity in recent years as a financial tool used by many investors to minimize risk and maximize gain in the types of investments they choose for their portfolios. The term “barbell” refers to two very different “weights” of assets attached by a thin bar. The strategy calls for unsophisticated, or older investors, to divide their assets into low-risk and high-risk investment buckets at each end of the barbell. This strategy is designed to provide protection against sudden downturns (low-risk) and to catch sudden market breakouts (high-risk).

More sophisticated investors, or fund managers, that are required to be “all-in” with stocks often describe the strategy as investing in both more conservative value stocks at one end of the barbell and more risky growth stocks at the other. Whatever the description of the barbell, or the percentage of assets placed in the low-risk and high-risk buckets, one rule remains constant. It is a fool’s game to place all of the investment assets in the middle of the risk spectrum. This “middle-of-the-road” approach guarantees a portfolio that remains stagnant and has little chance of benefiting from a market breakout that may occur once or twice a year.

Many observers believe that the barbell strategy developed after Nassim Taleb wrote his famous best seller, “The Black Swan,” in 2001. A Black Swan event is one that is highly improbable with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random and more predictable than it was.

As applied to investing, the thesis is that investors spend too much time on minutiae they already know. In fact, it is the unknown events that matter and which require protection from catastrophic losses. As we have seen in recent months, even if we correctly predict some things that impact the financial markets such as election results and the price of oil, other events like a global pandemic or war can override the predictable factors and throw our projections into the trash heap. Because it is impossible to time the market, the best strategy is the barbell approach.

Underlying the barbell strategy in investing is the fact that it will never maximize possible profits in a market upturn because a portion of the assets are being utilized to hedge against a downturn. Those of us who are investors and not gamblers are willing to accept this lower profit result.

I have been thinking about ways to incorporate a barbell strategy into aspects of my life other than investing. I have had to modify the terminology from low risk/high risk to include things I love to do at one end of the barbell to things I would rather keep in the box and never open on the other. The opportunities to utilize a barbell strategy were in unexpected places. Moreover, many of the activities I was hesitant to consider would improve my health or give me a more well-rounded view of the world.

First, I have applied the barbell strategy to exercise. While I go to the Cameron Wellness Center every other day, I was not losing weight. My workout routine involved stretching and lifting weights (which I enjoy) with little aerobic exercise (which I find tedious). I have slowly shifted a portion of my workout into aerobic walking and biking as I listen to music or sports/talk radio. Now if I am confronted with a Black Swan medical event, my improved heart health, endurance, and lower weight may help me survive.

Second, I have used the barbell strategy to examine my daily schedule. Since I am retired with fewer responsibilities, it was easier to slip into a house-bound, isolated existence. The pandemic accelerated this trend. Recently, I have sought activities outside my comfort zone and placed them on my agenda.

Lastly, I have employed a barbell strategy to compel myself to seek a wider range of political thought and views of the world. It is convenient and emotionally satisfying to only read and watch news sources that agree with my progressive views. To counter this one-sided perspective, a portion of my cable news intake now involves Fox News. I read the conservative opinion page of the Wall Street Journal every day. For the British point of view, I read the Economist and the Guardian. Taking in such diverse views while considering different causes and outcomes may better prepare me for a possible Black Swan event.

As a close friend never fails to tell me when we debate current events, “Nobody knows anything.” The older I get the more inclined I am to agree with him. In the end, the best strategy for improving mind, body and spirit is to avoid being boxed into a narrow point of view.

The world is complex and does not follow the precepts of a singular ideology, religion or school of thought. Our best protection is to take positions (some of which may be uncomfortable or against the grain) that guard against the unpredictable downside and which provide an opportunity to exploit the elusive upside.

Gary Stout is a Washington attorney.