The idea was popularized by Nassim Taleb, former hedge fund manager and author of the book "Black Swan". It has since been taken up by famous investors such as Ray Dalio and Mohammed El'Arian. Their theory: most of a person's wealth should be invested in ultra-secure investments, while the rest is invested in high-risk instruments with high appreciation potential. The fundamental concepts are those of risk and probability. Below, you can see the distribution of the different asset classes according to their risk and median allocation in traditional portfolios.

Risk of different types of instruments and typical allocation in traditional portfolios

Source: Bloomberg

The barbell investment strategy advocates combining two distinctly different baskets of investment assets - splitting them between the two extremes and leaving almost nothing in the middle. So instead of your portfolio being slightly conservative or aggressive, it is both hyper-conservative AND hyper-aggressive. 

Because of this construction, it limits downside risk - the total amount that can be lost - while exposing you to potentially unlimited upside.

Taleb suggests allocating 85% to 90% of assets in ultra-secure investments. The remaining 10% to 15% can be invested on a limited basis in speculative assets such as small and medium-sized companies, venture capital, emerging markets and cryptocurrencies. 

When it comes to portfolio allocation, Taleb believes that many professionals have misunderstood how to generate gains over the long term. They think their ongoing goal should be to find investments that make them a lot of money. 

But another priority is to minimize losses. A very high allocation to safe, low-risk investments has the key advantage of protecting investors from the risk of bankruptcy. When it comes to trading and investing, capital preservation is key. As Warren Buffett said, "The first rule of investing is: never lose money. The second rule of investing is: never forget rule number one." 

In general, balanced portfolios are invested in a diversified range of stocks, bonds, real estate and alternatives like gold for safety. The idea here is to create stability by allocating assets with different risk/return profiles. 

Although tactical adjustments may occur, the asset allocation within this type of portfolio does not change substantially. The performance is more or less stable but often mediocre over the long term. 

The Barbell strategy has proven resilient during past periods of increased volatility.

During the Great Financial Crisis, equity markets collapsed between September 2008 and February 2009. U.S. equity benchmarks fell  by 43%, but a dumbbell portfolio of U.S. stocks lost only 14%.

By 2022, the environment was significantly more complicated. Speculative investments (cryptos, venture capital, growth stocks) suffered badly, but some of the instruments that make up the defensive side - and in particular bonds - did not play their usual role as downside protection. The liquidity portion also failed to protect portfolios against rising inflation and therefore generated negative real returns. 

The barbell strategy can be used within bonds, stocks, real estate, venture capital, cryptocurrencies, etc. In the bond world, the barbell strategy involves investing on both ends of the yield curve, i.e. short and long durations (while avoiding the middle). In the equity markets, it consists of allocating a large portion of the portfolio to large caps in defensive sectors and a much smaller allocation to small caps with high appreciation potential (but also very risky). 

It is also interesting to note that we unconsciously apply the barbell strategy in our daily lives. Some examples. 

Family time. We avoid distractions when we spend time with our family. We give our full attention to the children on weekends, and work the rest of the week with little or no sight of them.