When the Barbell Investment Strategy Works and Doesn’t Work

Professional asset managers often like to promote the virtues of a “barbell” strategy for their portfolio, especially in a rising rate environment. In the simplest sense, the strategy is to invest in both extremes of a given variable, while avoiding anything in between. In the case of valuation, this would mean investing only in growth stocks and value stocks; in the case of credit quality, that would mean owning only high-yield bonds and low-yield bonds.

The idea is partly rooted in the notion that due to behavioral biases, investors tend to avoid the extremes of any asset variable or characteristic like valuation, so that the extremes of a class of assets are often undervalued. This is especially true where biases may be stronger, such as in rate environments where there is greater uncertainty.