creating a barbell

This is a metaphor that investors and their advisers use to describe the following strategy:

–sort the things you’re going to invest in  from, say, left to right in order of riskiness

–put the least risky on the extreme left, the most risky on the extreme right and fill in the rest in risk order

–if you were indexing, you’d have some of everything and your holdings would look kind of like a solid line along your riskiness scale.  Don’t do that.  Take a bunch of money from the center and put, say, half of it in the least risky assets and the other half in the most risky.

Now your portfolio looks like a barbell.

a persuasive–though bad–metaphor

The idea sounds good.  The picture of being a weightlifter instead of a wimp is appealing.  It also has tones of stability, familiarity and prudence.

why it’s a bad image

In general, the biggest problem with creating a barbell isn’t the idea itself, but the way risk is defined.  The metric that’s commonly used is day-to-day price variability.  Why?  …because that’s what finance professors use.  As far as I can see, the only thing short-term volatility has going for it is that the data are readily available.  But investors like you and me will find it hard to swallow that stocks that have wide daily trading ranges but are up 25% at the end of the year are somehow worse than stocks that seldom fluctuate in price and end the year 15% (or less) higher.

In particular, for today’s circumstances the issue is that models alike this almost always end up with bonds on the far left and emerging market stocks on the far right.  I’m not sure I’d get much sleep at night if I were loaded up with a barbell of Treasury bonds and frontier market stocks right now.  Symmetrical, yes, as safe as an index, probably not.

an S&P barbell forming?

What makes me write about this today is that during the current stock market turbulence, I’m noticing distinct barbelling in my own stock portfolio.

I own ZEN and SCTY, for example, not stocks I would recommend to anyone else.  I also continue to watch TSLA, although I no longer own it.  All three are pretty far to the right on the risk spectrum.  But all three are doing fine.

On the other hand, I’ve recently been looking for low PE industrial stocks.  I don’t care so much about dividend yield; I just want low relative and absolute PEs–relative meaning vs. both the market and the stock’s own history.  The couple I own (I’m still doing my homework, so no names) doing fine, too.

So it appears to me the stock market is now doing its own form of barbelling.

My conclusion, however, is not that stock market participants are stretching for extra risk and offsetting it with ultra-conservative names.  I think investors just want to get away from the center, at least for the moment, because they think it’s overvalued.