Barbell Portfolios

[Professor Disorientation]

I have been doing some research on Barbell Portfolios, putting two extreme asset classes together. The benefit is that you can control your loss. For example, $100,000 portfolio could be divided into $95,000 in T-Bills and the other $5,000 as risky as you possibly want to be. Your maximum loss would be only 5%, assuming the $5,000 portion went to zero. This would simply be a risk management tool that would perhaps give you the confidence you might not otherwise have to invest in a risky asset.

Any thoughts about this?

[Pointedstick]

This has been discussed a lot and is a good bet for a VP with the following caveats:

1. The 5% would have to be 10x as volatile to replicate the performance of an leveraged asset held at 50%. In reality, most levered ETFs for example top out at like 3X volatility.
2. Leveraged bets, even when used in targeted manners such as what you suggest, are inherently more risky and less rewarding than expected due to margin calls, cash reserve requirements, decay over time, high trading fees, etc.
3. This is not a safety portfolio like the PP; more can go wrong with leveraged assets when the world is falling apart. Gold coins will protect you, but a 3x gold ETF may shit the bed and die.

All that said, I believe there are some members here who have had good fortune with leveraged PP-like portfolios using like 3x gold, 3x treasuries, 3x stocks, and a larger cash allocation, or substituting a dollar index or something for cash. I occasionally tinker with the idea of implementing a version of the PP concept with leveraged ETFs and no cash at all to fully realize the natural conclusion of the PP philosophy of un-correlated volatile assets. Once you've got the uncorrelated assets, why not crank the volatility to the max? This would be strictly a VP play of course.

[Professor Disorientation]

Pointedstick,

Thank you for your insightful comment. Going 3X leverage is much too risky for me. Simple is better. There is something about buying a dividend-paying stock and collecting the dividends over the years that is more to my liking.

[MachineGhost]

Thank you for your insightful comment. Going 3X leverage is much too risky for me. Simple is better. There is something about buying a dividend-paying stock and collecting the dividends over the years that is more to my liking.

How do you feel about ignoring the underlying value in favor of the dividends?  Do you not view your gain from a total return perspective?  That is what stops me from doing dividend growth investing.  Because, what is the point of reinvesting your dividends into an overpriced stock?  All you will guarantee is mediocrity (i.e. market average) over time better served by a low-cost passive index.  And it is no different than corporate management commencing a stock buyback when the stock is overvalued (which unfortunately is what the majority does) or worse, taking on debt to do so (the current fad de jour).  Management is no better at timing the market than retail investors.  So there goes "Shareholder Yield" as well.

I think the 3x PP has merit.  I experimented with it briefly before realizing I was undercapitalized.  It will have higher transanctions costs due to much more frequent rebalancing with narrower bands.  I've yet to see a backtest that rebalances it more frequently.

[Professor Disorientation]

MachineGhost,

After years of attempting to be more of an investing gunslinger, I came to the realization my bias is more to the conservative side. I have dabbled in penny stocks and made a little money from them. I have also tried to replicate the stocks company insiders are buying. Again, it's not my thing. But dividend growth investing I find easier to understand and more philosophically honest to the kind of investor I am. Cold hard cash in the brokerage account arriving at fixed, frequent intervals is quite pleasing to me.

I used to own Drips, but now take all of my dividends in cash. Therefore, I'm not reinvesting into an overpriced stock. I simply keep the money in cash until an opportunity appears. Every stock I own pays a dividend. I could not invest in any other way. I admire speculators. I tried to be one, but I'm not. I can live with that. I have made tens of thousands in simple dividends over the years. No other investing method has allowed me to increase my wealth with such simplicity and peace of mind.

I especially like cumulative preferred stock in addition to my dividend growth stocks. There are numerous ways to increase your wealth in the stock market. Dividend investing is the route I have chosen.

[MachineGhost]

I used to own Drips, but now take all of my dividends in cash. Therefore, I'm not reinvesting into an overpriced stock. I simply keep the money in cash until an opportunity appears. Every stock I own pays a dividend. I could not invest in any other way. I admire speculators. I tried to be one, but I'm not. I can live with that. I have made tens of thousands in simple dividends over the years. No other investing method has allowed me to increase my wealth with such simplicity and peace of mind.

I especially like cumulative preferred stock in addition to my dividend growth stocks. There are numerous ways to increase your wealth in the stock market. Dividend investing is the route I have chosen.

Kudos for recognizing and admitting your weaknesses!  If more investors did that, they would be consistently profitable.

I really like the idea of not having dividends reinvested automatically into [overpriced] stock.  So when the stock does get to an undervalued state, you're using the accumulated dividends to buy them at fire sale prices, correct?  What do you do with the cash in the meantime?