What is a Barbell Strategy?

A barbell strategy is one of several different types of portfolio strategies that is designed to create a reasonable return on the investments that are part of the asset portfolio. Essentially, the barbell strategy is built around the concept of focusing on the maturities of the securities that are part of the portfolio and making sure that the maturity dates are either very close or at a distant date. Here is how the barbell strategy works, and what types of results are desired as a result of utilizing barbell strategies.

The key to employing a barbell strategy is seeking to include bonds and other securities that are set to mature either in the short term or the long term. While it is always a good idea to include a mix of investments with a variety of maturation dates, the difference in this approach is to concentrate those dates at opposite ends of the spectrum. This means that two blocs or groups are created within the portfolio, rather than having securities that mature consistently from one period to the next.

Part of the purpose of the barbell strategy is to allow for a quick turnover of a significant amount of the assets in the portfolio at one time. For example, attention should be paid to the bloc of short-term investments, so they can all be rolled over into new short-term investments as they reach maturity. Typically, this leads to an increase in the value of the investments that are turned over, thus increasing the overall value of the investment portfolio.

The same approach is taken with the long-term investments as well. As they reach a middle ground period, it is best to roll these investments over into new long-term securities. Once again, the goal is to make a little extra revenue on the rollover that can be used to purchase additional securities.

One thing to keep in mind about this sort of portfolio strategy is that long term investments tend to be more seriously impacted by changes in the interest rates. For this reason, it may be a little trickier to realize an increase from the turnover of long-term securities. Still, the rewards from the application of the barbell strategy are usually significant enough to make the anticipation of returns worth the level of risk involved. This is especially true if market conditions indicate the yield curve is going to flatten in the near future. Moving quickly will allow the acquisition of long term securities that will add to the value of the portfolio, while still making a profit off the turnover of the older long-term securities.