In my last post, I talked about the need for prudence in the current market environment. It is a message that has been well received by most people that I talk to. But the discussion often turns to “Well, what does that mean?”Prudence as an over riding philosophy sounds great, but how do we put that into practice? One way to address this is the Barbell Approach. In investing, the Barbell Approach is a strategy with two components. On one side is a very aggressive and potentially volatile investment with high expected returns. On the other side is a conservative cash-like investment with lower return expectations. This helps smooth out the overall volatility of your strategy. It also potentially gives you dry powder to invest when volatility turns down.
I think the interesting applications of the Barbell Approach extend out of investing and into personal finance. This can be a way of mentally preparing for increased volatility or a market downturn. Consider a person who has accumulated significant assets and is concerned about a market drop. They have a strategy they like and don’t want to change it, but they would still like to prepare. Or perhaps they hold a large portion of their wealth in highly appreciated stock and they don’t want to incur capital gains by selling. Here are some ways to apply the Barbell Approach:
I find this mindset applicable to all kinds of situations:
Using a Barbell Approach to your personal finances can help you prepare financially and mentally for any curves life throws at you. It is a great tool to help you stick to a well-defined strategy through the inevitable troubles that the market throws at us.
Note: The contents of this site are general in nature and not intended as specific investment advice. All investments are subject to risk; including loss of investment value. If you have any question regarding investments or concepts in these pages, please consult with an investment professional.