Barbell Strategy: The 90-10 Rule to Make You Rich

It might sound like snoozefest, but the Barbell Strategy can also possibly make you rich. 90% to safe investments, 10% to high risk ventures. Risky or brilliant? You decide.

A barbell strategy is most commonly applied with regard to bonds. And now you’ve fallen asleep, because that’s how exciting the topic is to most of you. Look, stay awake for a minute, as we try to explain how to apply it in other aspects of your life. You’ll be glad you listened.

The idea is that you place a huge amount of your assets--as much as 85 to 90%--in very safe investments. Think Singapore Savings Bonds, your CPF, etc. All the stuff that’s as risk free as possible.

The remaining 10 to 15%, however, should go into high risk, high payoff ventures. Examples are shares in start-ups with high potential, funding opportunities, or a trading account for you to play Wolf of Wall Street and feel all powerful.

Okay, what is this Barbell gibberish?

This is a method espoused by Professor Nicholas Nassim Taleb, who wrote The Black Swan and Antifragile. Rather than tell you to read the book (which would be a futile gesture, because most of you look at finance-related books like a superhero recognising your one weakness), here’s what you need to know:

Professor Taleb is famous for something called tail risk hedging. This is an approach that allows investors to minimise the impact of disasters, while reaping huge profits from opportunities. One of the things the good professor has written about is a barbell strategy:

“Let us use an example from vulgar finance, where it is easiest to explain, but misunderstood the most. If you put 90 percent of your funds in boring cash (assuming you are protected from inflation) or something called a “numeraire repository of value,” and 10 percent in very risky, maximally risky, securities, you cannot possibly lose more than 10 percent, while you are exposed to massive upside. Someone with 100 percent in so-called “medium” risk securities has a risk of total ruin from the miscomputation of risks. This barbell technique remedies the problem that risks of rare events are incomputable and fragile to estimation error; here the financial barbell has a maximum known loss.”

- Antifragile

All it takes is a swing on one end of the barbell to have a dramatic effect. If there is a major stock market crash and the financial world is bombed back into the stone age, guess who wins: you, because you didn’t risk all that money and kept it while others went broke.

If there is a major upswing in your high risk investments, who wins out? Again, you. Because you only took a tiny risk (10 to 15%), to rake in huge and disproportionate profits. While others may have won along with you, they probably did it at much higher risk.

Now all of this is very relevant to people investing in stocks and bonds, but it may be out of reach for you. Well here’s an example of how to apply it in other, simpler aspects of life:

Don’t Put EVERYTHING in Your Startup Ventures

There’s plenty of people will tell you that your small business can’t succeed, if you don’t devote all your time and resources to it. You’re better off not listening to them.

If you pour everything you’ve got into a business venture (and some 80% of startups fail in the first year), your risk of total ruin is significant. Even if you get back on your feet, it can take years of effort, which will impact your retirement fund.

Using a barbell strategy, you would start off small. Invest 10 - 15% of your money at the most, and don’t quit your job to work on it full time. If it fails, shrug and move on. You didn’t lose much. If it succeeds, you would have found a working business model at much lower risk than other startup owners took.

Do Take SOME Risks

Most of your money should be somewhere safe, like a boring old deposit (although do talk to your financial advisor about better, equally safe assets). With the remaining amount, you should be aggressive. Don’t just save all of it, as you are exposing yourself to another risk: inflation rate risks, which will outpace your safe assets and cause you to miss retirement targets.

Do consider higher risk ventures, such as starting your own business (see point 1), or going on a trading course and experimenting. If something goes wrong, you won’t be devastated. If something goes right, the returns from your riskier investments will offset the low returns of your safer ones.

Just always ensure the bulk of your money is allocated to the safe end.

Don’t Try to Predict Risks, Just Brace for the Consequences

The barbell strategy--and in fact the entire concept of a Black Swan (an unforeseen event, such as a stock market crash)--is based on our inability to read the future. None of us can predict specific disasters, we can only brace for their consequences.

For example, you cannot refuse to use the roads forever, for fear of an accident. At some point you will have to cross one, use the bus, etc. But you can buy insurance, which will help you to deal with the consequences of any accidents.

Another simple way to apply this strategy: what is the best defence against poor health? Keeping slim may prevent a heart attack, but it won’t stop you accidentally breaking your nose in a boxing match. Avoiding vigorous sports like boxing may prevent many injuries, but it won’t prevent your arteries clogging from lack of exercise.

The list goes on, and you can see we can’t prepare for every eventuality; not without wearing a sealed suit every day and refusing to step out the house. What we can do is build an emergency fund, of about six months of our income, which we perpetually have access to. This can help with treatment and recovery, for the inevitable accident we don’t foresee.

Never believe that you have the power to predict and evade disasters. Focus on having the reserves to deal with them when they come.

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