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A Barbell Investment Strategy

In 2021 we witnessed an insurrection at the Capitol, a new President, the reappointment of Federal Reserve Chairman, a new Covid-19 variant (Omicron), rising inflation, volatile swings in Crypto prices, geopolitical calamities, and numerous domestic events. Despite the wild ride in 2021, the US stock market recorded new highs.


So, what will 2022 bring?


After scaling a wall of worry last year, history has shown that when one indexes dramatically outperformed its peers, with SPX up 26.9%, INDU gained 18.7%, and Nasdaq Composite appreciated 21.4%, the following year can still produce another positive year. The average gains the year after the stellar returns comes to around 7.5-7.75%. Although optimism may cool into the year, market pundits predict returns in the high-single digits for the SPX Index during 2022.

Regardless of your expectations for the SPX Index in 2022, the number one rule of investing is not to lose money.


All investing strategies involve generating the best return on an investment based on the level of risk taken. The barbell investment strategy suggests taking a balanced approach to investing. Advocates of the barbell investment strategy recommend the best way to generate sustainable long-term returns is to only invest in the extreme opposite sides of risk spectrums, namely high-risk and low-risk producing assets, and avoid the middle-risks.


The barbell investment strategy attempts to pair two distinctly different types of assets. One side of the investment basket will hold low risk and relatively safe investments, while the other comprises risky, highly appreciated, and growth-type investments. The barbell strategy would avoid the middle of the risk spectrum. The concept is to protect the investment portfolio due to an abnormally volatile market swing caused by an unexpected external shock to the financial system (i.e., trade wars, mid-term elections, runaway inflation, a new Covid-19 variant, Fed policy mistake, hard landing, etc.).

Over the last two months of the year, there was a decisive tilt by investors favoring a more balanced investment approach focusing on the two extreme opposite equity risk spectrums. The stellar returns of this investment approach into year-end 2021 surprised even the astute and seasoned investors.


A balanced equity portfolio of equal-weighted investments in low-risked and high-risked S&P sectors produced superior returns. For instance, the relatively safe S&P Utilities (XLU) returned 7.2% over the past eight weeks ending on January 3, 2022. The low-beta Consumer Staples (XLP) rewarded investors with gains of 6.6% for the same period. The defensive sector, Healthcare (XLV), returned 4.6% over the time frame. Investments in the higher risk spectrum also produced favorable returns. The higher-beta Technology (XLK) generated 5.1% over the past eight weeks. The economically sensitive Consumer Discretionary (XLY) returned 3.4%, and the Real Estate (XLRE) gained 7.4%.


During the same period, the SPX Index gained a respectable 2.6% falling short of the barbell investment strategy returns of 5.72%. Will this balanced prevail into the new year?


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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