In finance, a barbell strategy is formed when a trader invests in long- and short-duration bonds, but does not invest in intermediate-duration bonds. This strategy is useful when interest rates are rising; as the short term maturities are rolled over they receive a higher interest rate, raising the value.[1] A contrasting strategy is the bullet strategy, which involves investing only in intermediate-term bonds.
A barbell strategy is one of several different types of portfolio strategies that is designed to create a reasonable return on the investments that are part of the asset portfolio. The barbell strategy is built around the concept of focusing on the maturities of the securities in the portfolio by making sure the maturity dates are either very close or at a distant date. It is similar to the laddered approach.[2]
Applicationedit
The key to employing a barbell strategy is seeking to include bonds and other securities set to mature either in the short term or the long term. While it is always a good idea to include a mix of investments with a variety of maturation dates, this approach concentrates those dates at opposite ends of the spectrum. This means that two blocks or groups are created within the portfolio, rather than having securities that mature consistently from one period to the next.[3]
Benefitsedit
The barbell strategy[4] allows for a quick turnover of a significant amount of the assets in the portfolio at one time. For example, attention should be paid to the block of short-term investments, so they can all be rolled over into new short-term investments as they reach maturity. Typically, this leads to an increase in the value of the investments that are turned over, thus increasing the overall value of the investment portfolio.[5]
Theoretical resultsedit
Under simplistic assumptions about forward rates, a bar-bell portfolio comprising only the shortest dated bond and the longest on offer has been shown to maximize modified excess return.[6]
Variationsedit
One variation of the barbell strategy involves investing 90% of one's assets in extremely safe instruments, such as treasury bills, with the remaining 10% being used to make diversified, speculative bets that have massive payoff potential. In other words, the strategy caps the maximum loss at 10%, while still providing exposure to huge upside.[7] This strategy works best during periods of high inflation for three reasons: High interest rates make put options cheaper in accordance to the Black Scholes option pricing formula, stock crashes have historically occurred during periods of high interest rates (1987, 1998, 2000, 2007, etc.), and a high interest rate helps finance the trader's bankroll for when the market doesn't crash, which is most of the time. With interest rates still at zero, this strategy is much less effective. Thirty-year bonds pay more, but are volatile. Foreign and corporate bonds are also quite volatile and far from risk-free.[7]
Referencesedit
^Cohen, Marilyn. "The Barbell Strategy". Forbes.com. Retrieved 19 March 2012.
^Adams, Katie. "How do I use a barbell strategy?". Investopedia. Retrieved 19 March 2012.
^Smith, Jim. "The Barbell Investment Strategy". The College Investor. Retrieved 19 March 2012.
^Lawler, Jasper. "Is it time to drop the barbell investing strategy in 2021?". www.flowbank.com. Retrieved 2021-02-03.
^Cohen, Marilyn. . Forbes.com. Archived from the original on July 25, 2009. Retrieved 19 March 2012.
^Cotton, Peter. "When A Bar-Bell Bond Portfolio Optimizes Modified Excess Return". Retrieved 20 June 2013.
^ abMarjanovic, Boris. "Profiting From Market Randomness". Seeking Alpha.
External linksedit
Cohen, Marilyn (May 9, 2005). "The Barbell Strategy". Forbes.
January 01, 1970
barbell, strategy, finance, barbell, strategy, formed, when, trader, invests, long, short, duration, bonds, does, invest, intermediate, duration, bonds, this, strategy, useful, when, interest, rates, rising, short, term, maturities, rolled, over, they, receive. In finance a barbell strategy is formed when a trader invests in long and short duration bonds but does not invest in intermediate duration bonds This strategy is useful when interest rates are rising as the short term maturities are rolled over they receive a higher interest rate raising the value 1 A contrasting strategy is the bullet strategy which involves investing only in intermediate term bonds Contents 1 Concept 2 Application 3 Benefits 4 Theoretical results 5 Variations 6 References 7 External linksConcept editA barbell strategy is one of several different types of portfolio strategies that is designed to create a reasonable return on the investments that are part of the asset portfolio The barbell strategy is built around the concept of focusing on the maturities of the securities in the portfolio by making sure the maturity dates are either very close or at a distant date It is similar to the laddered approach 2 Application editThe key to employing a barbell strategy is seeking to include bonds and other securities set to mature either in the short term or the long term While it is always a good idea to include a mix of investments with a variety of maturation dates this approach concentrates those dates at opposite ends of the spectrum This means that two blocks or groups are created within the portfolio rather than having securities that mature consistently from one period to the next 3 Benefits editThe barbell strategy 4 allows for a quick turnover of a significant amount of the assets in the portfolio at one time For example attention should be paid to the block of short term investments so they can all be rolled over into new short term investments as they reach maturity Typically this leads to an increase in the value of the investments that are turned over thus increasing the overall value of the investment portfolio 5 Theoretical results editUnder simplistic assumptions about forward rates a bar bell portfolio comprising only the shortest dated bond and the longest on offer has been shown to maximize modified excess return 6 Variations editOne variation of the barbell strategy involves investing 90 of one s assets in extremely safe instruments such as treasury bills with the remaining 10 being used to make diversified speculative bets that have massive payoff potential In other words the strategy caps the maximum loss at 10 while still providing exposure to huge upside 7 This strategy works best during periods of high inflation for three reasons High interest rates make put options cheaper in accordance to the Black Scholes option pricing formula stock crashes have historically occurred during periods of high interest rates 1987 1998 2000 2007 etc and a high interest rate helps finance the trader s bankroll for when the market doesn t crash which is most of the time With interest rates still at zero this strategy is much less effective Thirty year bonds pay more but are volatile Foreign and corporate bonds are also quite volatile and far from risk free 7 References edit Cohen Marilyn The Barbell Strategy Forbes com Retrieved 19 March 2012 Adams Katie How do I use a barbell strategy Investopedia Retrieved 19 March 2012 Smith Jim The Barbell Investment Strategy The College Investor Retrieved 19 March 2012 Lawler Jasper Is it time to drop the barbell investing strategy in 2021 www flowbank com Retrieved 2021 02 03 Cohen Marilyn The Barbell Strategy Forbes com Archived from the original on July 25 2009 Retrieved 19 March 2012 Cotton Peter When A Bar Bell Bond Portfolio Optimizes Modified Excess Return Retrieved 20 June 2013 a b Marjanovic Boris Profiting From Market Randomness Seeking Alpha External links editCohen Marilyn May 9 2005 The Barbell Strategy Forbes Retrieved from https en wikipedia org w index php title Barbell strategy amp oldid 1181275112, wikipedia, wiki, book, books, library,
