Using the Barbell Portfolio Strategy to Capture Positive Asymmetry

I’ll go straight there.

The portfolio setup (strategy) I use is known as ‘Bar’ – and it belongs to all speculators “Mental toolbox”.

Many readers know that I swore by this strategy – and use it very often.

But first – a bit of background: I came across this interesting setup while reading ‘Antifragile’ by Nassim Taleb (a book I have very recommend – and a must read in the Complete reading list of anonymous speculators).

Now – as the name suggests – this setup looks like exactly like a weight bar (aka a bar) that is out of balance.

Or – to put it simply – just imagine a bench press bar that has a weight of 45 lbs on the left side – and a weight of 10 lbs on the right side.

So – a dumbbell wallet means that a speculator puts more of their capital on one side – and only one little on another side.

And absolutely nothing in the middle (remember – this only focuses on the ends).

What I mean is – on the one hand with most of the speculators’ capital – let’s say 90% – will be in very conservative posts. Those that are considered very safe and ‘low risk’ investments (such as treasury bills, bonds, utility ETFs, cash, etc.).

And the opposite – the rest ten% – will be speculative positions considered ‘long shots’ or risky (such as volatile growth stocks, currencies, long term stocks, out of the money, calls and puts, junior mining stocks, etc.).

At this point you should imagine something like this. . .

Keep in mind that I am using this wallet setup because I find it the the most practical.

it protects me Three manners. . .

First of all – I can perceive the average annual earnings of 4-7% (or whatever the market average) from my safe and low risk side (with 90% of my investments).

SecondI can always seize any upside speculative potential from spikes in volatility and market turmoil through my high risk – high gain side (with the remaining 10%).

And third – I am protected (covered) during massive sell-offs and market chaos (for example – I will buy cheap and long-standing puts on very safe stocks and ETFs on my low risk side – it’s called tail blanket– i.e. protection against a significant downside risk).

To give you an idea, I’m using a dumbbell portfolio with a 75/25 ratio. . .

Meaning – the 75% is in conservative (‘boring’) positions such as cash, dividend ETFs, utilities, government bonds and AAA corporate bonds.

But the remaining 25% are in speculative positions (which is my favorite part to play with) because that’s where most of the sudden and huge wins will come from. . .

For example – a speculator can make huge gains – 100%, 500%, 1000% and even more – by allocating capital to speculative games.

So what are the potential speculative games?

Well, at the moment I am invested in quality junior gold stocks or other small micro cap mining stocks. I also buy tons of one-year out-of-the-money call options on select grade gold stocks as well as gold mining indices.

I also have long term and out-of-the-money put options on some currencies and some ETF countries which I think are fragile.

So – for example – if chaos in the market suddenly hits (a black swan), or if the US dollar plunges because the Federal Reserve suddenly cuts rates, then gold will soar – and I can do huge wins.

What if it doesn’t? This is good – I will still get the comfortable 4-7% of the ‘safe and boring’ aside while sleeping well at night knowing my downside risk is covered.

But – I’m even going to take it a step further using the bar strategy to cover myself.

Sometimes I buy put options out of the year on the very actions which on my side are “boring”.

Meaning: I will use 2% of my capital to buy put options on the S&P 500 ETF – the $ SPX (this is the tail cover).

Now – if a market correction occurs and the market collapses – hopefully my $ SPX the put options will offset any loss resulting from the fall in the ETF. And maybe even generate a huge net profit (i.e. put option profits exceed $ SPX equity losses). . .

What if there is no crash? Then my options expire worthless and all I lose are the premiums I paid up front – nothing more.

These are just a few of the things I do with my own dumbbell strategy.

So – in short – a speculator must position themselves to take advantage of potential volatility and ensure that their portfolio not only resists it – but wins (be anti-fragile).

You can be creative and tailor it to your own risk tolerance and goals. (Like a 98/2, 80/20 or even 50/50 ratio).

Thus, depending on the current state of the market and the capital cycle, a speculator may be more defensive or more aggressive.

I try to rebalance a few times a year at least.

But – to put it simply – I mostly sit on cash and bonds in my “boring side” and use long-standing, no-money options in the “Speculative side”.

This dumbbell strategy has worked very well for me in the past – and I will continue to use it. Especially since it gives me positive asymmetry (low risk – high reward).

Hope you will consider it more (here is a good article covering the strategy of Barbell and Nassim Taleb) – especially if you are a speculative macro trader like me.

PS – if you are interested in the dumbbell wallet and how I have used it to outperform the market while limiting my downside ~ check out Anonymous Speculators: Premium

Source link

Don F. Davis

Leave a Reply

Your email address will not be published.