A barbell portfolio has 2 simple components.
Absolutely no risk with one part of the portfolio. All the risk is taken with the other part.
Typically, a barbell portfolio’s safe part is in govt securities, bonds or Bank Fixed Deposits, anything that has no default risk.
The other part is exposed to a risk that you are comfortable with – direct stocks, mutual funds, PMS, private equity, anything else you might want to think.
You also get to decide how much to allocate to each part. Most investors working with this strategy, tend to keep a few years’ worth of expenses in safe investments, while allowing the rest of the portfolio to build wealth.
Note that the core idea of a barbell is to completely separate the risk in one bucket. The risk free bucket is for the peace of mind, even then the risky bucket is going through strong volatility, uncertainty, temporary losses.
Some examples of barbell portfolios:
- 5 years of expenses or more in Govt sponsored schemes (EPF, PPF, RBI Bonds, etc.) and Bank Fixed Deposits; Rest in Large equity using direct stocks + mutual funds.
- Moderate Investor – 60% of the investments in Govt / PSU Bonds and 40% in only large cap+mid cap dividend paying stocks
- Fixed Income / Bonds – 50% in safe liquid funds, Bank FDs, PSU bonds; 50% in Long term bonds. No medium term.
Barbell, then, also doubles up as a behaviour management tool for investors.
Let’s take some of them up in the upcoming editions of the LightHouse Newsletter.
Between you and me: How would you do a barbell portfolio? Do share your thoughts and comments.