What is the Barbell Investment Strategy?

Published / Last Updated on 02/09/2022

Stock markets have taken a hit this week on expectations of the US Federal Reserve and the Bank of England consider more robust action on interest rate increases to curb inflation.  Even the new Chancellor of the Exchequer, Nadhim Zahawi, has been in the US this week to talk about energy price inflation but you can ‘bet your life’ that general inflation, recession, and further interest rate increases were on the agenda too.

Difficult to Forecast Right Now

It is extremely difficult for advisers, investment professionals or economists to predict the future of markets.  With they bounce back, or will they fall further?  Eventually they will bounce back but trying to ‘call the market’ is nigh of impossible given the way forward is obscured due to:

  • Russia/Ukraine
  • Energy prices
  • China’s unpredictable lockdowns due to its zero covid-19 tolerance policy
  • Record inflation
  • Interest rate increases
  • Depth of recession
  • Property prices falling and mortgage costs up.

We could go on and on …

Barbell Investment Strategy

A barbell is a weightlifting bar that has weights at either end with nothing in the middle.  The Barbell strategy mirrors this where you balance your investment portfolio for risk and reward with one end loaded with high-risk stock market funds, the other end is loaded with low-risk investment funds such as cash and money market funds with nothing in the middle i.e., no balanced or mid-range funds.

Investing at both extremes is a hedge against stock market crashes with half in cash but if your prediction is wrong and markets bounce up, you also have half your portfolio taking advantage of this.

Difficulty with Barbell Strategy? 

We suggest that currently, Barbell strategy is dangerous given economic forecasting is so difficult at present with all the issues mentioned above.  A combination of recession and stock market falls dragging your stock market end of the barbell down and then 10%+ inflation, expected to peak at near 20% in the next year, devaluing the spending power of your cash at the other end of your barbell by a staggering 20%. 

That said, we think with inflation, cost of living rises, interest rate increases and us all then making cutbacks on spending, inflation could fall back very quickly.  Barbell then starts to look attractive.  Lower inflation and higher interest rates will benefit cash holdings and you are also ready at the other end of your bar loaded with higher risk stock market funds when the bounce back comes.

We have taken the approach that there are no likely winners at present, so we are holding equities and buying even more as markets fall.  We intend to ride out the recession buying even more equities and will wait for the significant bounce back that will come, we just do not know when.  That said, we are very positive for markets in the medium term i.e., 3-5 years.

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