I get frequent questions about my personal portfolio, especially the trend following portfolio in my non-registered investment account. One of the questions I get is why I don't use the Leveraged Barbell Portfolio strategy that I talk about in the blog.
My answer is that I do use a leveraged barbell portfolio strategy in my non-registered account. It's simply not as passive as the strategy I shared.
A barbell is an iconic, effective, and simple piece of weightlifting equipment. The lifter loads a 220 cm bar with an equal number of iron plates on each side to the desired total weight.
If you look at the loaded bar lengthwise, it is mostly just an empty bar. But that weight on the extreme ends of the bar can weigh hundreds of pounds. A small part of the total bar carries all the weight!
An investor could break down this same idea into an investing concept. Most of a barbell portfolio is invested in pretty boring assets that generate a reliable, moderate return.
However, like the ends of the barbell, a smaller amount of the total portfolio is invested in risky assets that can generate large returns and does the heavy lifting for your portfolio.
The barbell portfolio tries to minimize big losses, provides great risk control, and the investor has the opportunity to experience great returns.
Barbell Portfolio Structure
In a barbell portfolio, 60 to 90 percent of the portfolio should be invested in safe assets. We are looking for stability and security with dependable returns.
Of course, the returns for assets with these characteristics won't be that high. Even 2 to 3 percent real returns (4 to 6 percent gross nominal) are okay here.
The exact amount of safe assets you choose should depend on what you use for your risky assets and your overall risk tolerance.
A portfolio with just 60 percent in safe assets could see a 40 percent decline.
Some examples of good safe assets include:
- Broad bond funds (AGG, BND, XBB.TO, HBB.TO)
- Short-term government bonds (SHY, VGSH, XSB.TO, VSB.TO)
- Short-term corporate investment grade bond funds (IGSB, VCSH, XSH.TO, VSC.TO)
- Intermediate-term government bonds (IEF, VGIT, XGB.TO, ZGB.TO)
- Split bond portfolio (half short-term bonds, half long-term government bonds)
The remaining 10 to 40 percent of your portfolio will be invested in risk assets. On this side, we are looking for high period returns.
The assets invested in here should, at minimum, have shown themselves to double in value in a year or less on several occasions in the past.
The precise assets you use will depend on your overall risk tolerance and your allocation to safe assets. If you are allocating 40 percent of your portfolio to risky assets, you should choose less extreme options.
Some examples of potential high return assets include:
- Leveraged ETFs
- Small cap stocks
- Technology stocks
- Biotech stocks
- Private equity
Always protect your portfolio! Commit to a very hands off approach with your safe asset allocation and do not pursue outsized returns here. You do not want to lose this money.
Generally speaking, the higher your allocation to the safe assets is, the more durable and stable your overall returns will be. While a modified barbell portfolio might contain just 60 percent safe assets paired with a 40 percent exposure to a leveraged index fund, a true barbell portfolio would have at least 80 percent safe assets paired with the highest risk choices like options.
Leveraged Barbell Portfolio
In the Leveraged Barbell strategy which I so enthusiastically share on this blog, I talk about an extremely passive method for employing the barbell strategy.
Using leveraged ETFs and short-term bond ETFs, you only need to adjust your portfolio allocation once per year. That's as easy as the Couch Potato strategy, but your returns and protection are better.
Since the Leveraged Barbell Portfolio I share uses broad equity index ETFs, the 3x daily leveraged S&P 500, you can safely allocate higher amounts to the risk side. Still, I would recommend the average investor allocate between 60 and 70 percent of their portfolio to bonds.
My Leveraged Barbell Portfolio
Knowing that a barbell portfolio is one mostly invested in safe assets with a smaller allocation to risk assets, you will see that my trend following portfolio is actually a leveraged barbell portfolio.
In my trend following portfolio, I track U.S. equities, developed international equities, emerging international equities, gold, silver, and currencies.
Currencies can be thought of as a safe asset in many ways. I do not use any leverage when making bets on currencies, they are easy to trade on the upside or downside as currencies are pair-traded, and the markets are extremely liquid and price efficient. I also take pretty small positions on currencies.
I use currencies, including the U.S. dollar and Canadian dollar, as they are more flexible and tax efficient than investing in bonds in my non-registered account. I would rather earn capital gains than interest income.
To get some perspective on my current position, I am a little over 90 percent in currencies at the moment. Most of that is U.S. dollars.
I use leverage to invest in each equity and commodity position. This was done with leveraged ETFs and I am going to start using LEAPS options for more efficient capital use.
As I slowly get out of the last of my leveraged ETFs and the market begins to send upside signals on equities, I will be investing via LEAPS options only. It is likely that my portfolio will rarely be more than 20 percent allocated to risky assets.
I am very cautious about shorting (betting against) many assets, particularly equities. It is extremely difficult to short equity index funds and make money. This means I will primarily only bet on the upside signals for equities; when the signal is down, I will be in cash.
I see potential for upside and downside bets on gold and silver when using LEAPS options. This means as I get my LEAPS options trading going, I may be invested in gold and silver calls or puts at all times, depending on the signal and sized based on volatility.
In effect, this will be a barbell portfolio where the risk assets (up to about 20 percent of the portfolio) are LEAPS options that are entered or exited based on trend following signals.
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