Can the barbell investing strategy give portfolios extra muscle?

Investing in both the best- and the worst-performing sectors of the last year could generate better returns

Can the barbell investing strategy give portfolios extra muscle?

Everybody loves a winner, but people also love underdogs. So when it comes to stock-market investing, it’s easy to feel torn: do you bet that the winning bandwagon will keep rolling, or should you bet on last year’s losers to make a comeback?

You should actually choose both, according to one study. “Buying both the top three and bottom three market sectors in terms of the prior year’s performance is known as a barbell strategy—a strategy that has been made easier to follow thanks to the plethora of exchange-traded funds,” said Simon Constable, a contributor to the Wall Street Journal.

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Citing research by a strategist from research firm CFRA, Constable said a barbell strategy applied from 1991 through 2017 — in which the best and worst sectors were allocated 50% each and rebalanced each year — would have yielded a compounded 10.7% including dividends, as opposed to 10.3% for the S&P 500. The strategy would also have made money 78% of the time, though taxes and transaction costs weren’t included.

Over that same period, a strategy that buys and sticks with only the three sectors would have beaten the market 63% of the time, yielding compounded returns of 10.3%. Going for the three worst sectors, on the other hand, would have generated 10.4% in compounded returns, though it would have outperformed only 44% of the time.

The extra oomph from a barbell approach may seem small, but compounded returns would add up significantly over time. However, it’s not for the faint-hearted.  “Anytime you deviate from a diversified portfolio, or you deviate from holding investments in the 11 economic sectors, then you will have a concentrated portfolio,” Vinny Catalino, global investment strategist at Blue Marble Research, told the Journal.

“Even if you have something that works, it won’t work all the time,” he said. “If it works 70% of the time, then you are doing great.”

While the approach is not risk-free, it has certainly gotten easier to implement. With the increasing diversity of sector-focused ETFs, rebalancing portfolios from one set of sectors to another has surely gotten more convenient compared to previous years.

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