Nassim Nicholas Taleb's Investing Strategy Example: The Barbell Portfolio

Benefit from low-probability tail end events or go home

The barbell investing strategy is an investment approach that involves creating a portfolio with two extremes: a large portion of safe, low-risk investments and a smaller portion of high-risk investments. The purpose of this strategy is to take advantage of the potential returns of high-risk investments while minimizing the impact of potential losses by keeping the majority of the portfolio in safer investments.

Nassim Nicholas Taleb, has famously articulated this strategy in his book “The Black Swan”:

"If you want to be robust to rare events, you have to put some eggs in one fragile basket, and then many eggs in an extremely robust one. That is what I call the barbell strategy: put 90% of your resources in extremely safe instruments, and 10% in extremely speculative ones. Do not keep any moderate risk around. You will get richer or poorer, but you will never be dull."

The key is to allocate a small portion (say 10%) of your portfolio to assets that have a tail-end probability (small chance) to take off and produce high returns - think ARKK^2 or Zoom in 2019. This is what you as an investor are absolutely willing to lose. The rest of your portfolio is dedicated to mitigate risk - that’s it, not low returns, just to manage risk. Think of assets that can be act like inflation hedges and preserve the value of your money: one example of these are scarce precious metals.

The goal of this strategy is to benefit from the optionality of rare breakthroughs, while the rest of the portfolio retains the value of your money.

This is a high risk strategy with a multi-year investment horizon. If you think that your stock is going to jump and stay up next year, you’re not doing it right.