A Concentrated Barbell Strategy
It starts with identifying two types of stocks you think would work well together (“well” meaning increasing risk-adjusted returns). The simplest version could be a portfolio of stable, quality companies (ex. Google) paired with high growth stocks (ex. Peloton), all of which you believe will be good investments over the long-term.
*An ETF version of this strategy could be a 50/50 portfolio of Cloud Computing ETF (ticker: CLOU) and small-cap value ETF (ticker: VIOV) that is rebalanced on a quarterly basis.
The strategy would be simple to implement. You start by investing 50% of the portfolio equally weighted in 10 quality businesses (this definition is up to the investor, but think Disney or J&J). The other 50% goes into 10 growth stocks (again, equally weighted). This totals 20 stocks, each at a 5% weighting in the portfolio. Rebalancing would be on an annual basis (to take advantage of long-term capital gains), and would simply bring each security back to a 5% holding.
A “concentrated barbell” approach like this allows you to systematically invest in companies that hopefully will work in tandem during bull and bear markets. For example, growth stocks typically perform well in a bull market, but have larger drawdowns and underperform coming out of a recession. This would be counteracted by quality, low-vol names that typically do the opposite.
A few concerns with this strategy
Just because you think these 20 stocks will be good investments doesn’t necessarily mean they will be. Is this strategy no different than being a standard active manager with a concentrated portfolio? Maybe on an absolute return basis. But I do think it would win on a “keeping your sanity” basis, which is the most important criterion when trying to build something that can last for a long time. It forces you to trim your exposure to riskier, high-growth stocks if they are doing well, leaving all sell decisions to the systematic strategy.
Rebalancing to a 5% weighting may do the opposite of the Peter Lynch “water the flowers, trim the weeds” strategy. Just because a stock goes down doesn’t mean it is a buy, and conversely, when a stock goes up it doesn’t mean you should always sell.
There is no backtest to show how this strategy worked in the past, and it is not a true quantitative barbell strategy. However, for individual investors that cannot invest in any complex, factor-based strategies with their own money, this “quality paired with growth” portfolio may be a nice framework to work off of. If your someone like me that wants exposure to stable, durable businesses like Altria Group but also wants to invest in high-growth names like Roku, approaching your portfolio in a systematic manner can eliminate any irrational urges that come when the market is acting, well, irrational. And like I mentioned above, avoiding irrational decisions is the most important thing when trying to compound your money over decades.
Disclosure: The author is not a financial advisor, and may have an interest in the companies talked about.