I’ll get right to it.

The portfolio set-up (strategy) I use is known as ‘The Barbell’ – and it belongs in every speculators ‘mental toolbox’. 

Many readers know that I’ve sworn by this strategy – and that I use it very often.

But first – a little context: I came across this interesting set-up while I was reading ‘Antifragile’ by Nassim Taleb (a book I highly recommend – and a must-read in the Speculators Anonymous Comprehensive Reading List).

Now – as the name says – this set-up looks exactly like a weight lifting bar (aka a barbell) that’s off-balance.

Or – putting it simply – just imagine a bench-press bar that has a 45 lb weight on the left side – and a 10 lb weight on the right side.

Thus – a barbell portfolio means that a speculator puts most of their capital on one side – and only a little on the other side.

And absolutely nothing in the middle (remember – this only focuses on the extreme ends).

What I mean is – on the one end with most of the speculators capital – let’s say 90% – will be in very conservative positions. Those that are considered very safe and ‘low risk’ investments (such as T-bills, bonds, utilities ETF’s, cash, etc).

And on the opposite end – the remaining 10% – will be speculative positions that are considered ‘long shots’ or risky (such as volatile growth stocks, currency plays, long dated, out of the money, call and put options, junior mining stocks, etc).

At this point – you should be picturing something like this. . .

Keep in mind that I use this portfolio set-up because I find it the most practical.

It protects me three ways. . .

First – I can collect the average 4-7% annual gains (or whatever the market average is) from my safe, low risk side (with 90% of my investments).

Second – I can still catch any speculative upside from spikes in volatility and market turbulence via my high risk – high payoff side (with the remaining 10%).

And third – I’m protected (hedged) during big sell offs and market chaos (for example – I’ll buy some cheap, long dated, put options on the very safe stocks and ETF’s in my low-risk side – this is called ‘tail-hedging‘ – i.e. protection from large downside risk).

To give you some perspective – I use a barbell portfolio with a 75/25 ratio. . .

Meaning – the 75% is in conservative (‘boring’) positions like cash, dividend ETF’s, utilities, government bonds, and AAA corporate bonds.

But the other 25% is in speculative positions (which is my favorite part to play with) because that’s where most of the sudden, huge gains will come from. . .

For instance – a speculator can make massive gains – 100%, 500%, 1,000%, and even more – by allocating capital into speculative plays.

So – what are some potential speculative plays?

Well – as of right now – I’m invested in quality junior gold stocks or other small-micro-cap mining stocks. I also buy tons of one year, out-of-the-money call options on select quality gold stocks and also on gold mining indexes.

I also own long dated, out-of-the-money put options on select currencies and country ETF’s that I believe are fragile.

Thus – for example – if chaos in the market strikes suddenly (a black swan), or the U.S. dollar plunges because the Federal Reserve suddenly cuts rates, then gold will soar – and I can make huge gains.

And if it doesn’t? That’s fine – I’ll still collect the comfortable 4-7% from the ‘safe and boring’ side while sleeping well at night knowing my downside risk is hedged.

But – I will even take things a step further using the barbell strategy in order to hedge myself.

Sometimes I’ll buy one year, out-of-the-money put options on the very stocks that are in my ‘boring’ side.

Meaning: I’ll use 2% of my capital to buy puts on the S&P 500 ETF – the $SPX (this is tail-hedging).

Now – if a market correction happens and the market tanks – hopefully my $SPX puts will offset any losses from the ETF’s decline. And maybe even yield a huge net-profit (i.e. the put option profits out-weigh the $SPX equity losses). . .

And if there’s no crash? Then my options expire worthless and all I lose are the premiums I paid upfront – nothing more.

These are just some of the things I do with my own barbell strategy.

So – in summary – a speculator must position themselves to benefit from potential volatility and make sure their portfolio not only withstands it – but gains from it (be antifragile). 

You can be creative and build it to fit your own risk tolerance and goals. (Like a 98/2, 80/20, or even 50/50 ratio).

Thus – depending on where things are in the current market and capital cycle – a speculator can be more defensive, or more aggressive.

I try to re-balance a few times a year at-least.

But – putting it simply – I mainly sit on cash and bonds in my ‘boring side’ and use long dated, out-of-money options in the ‘speculative side’. 

This barbell strategy has done very well for me in the past – and I will continue using it. Especially since it gives me positive asymmetry (low risk – high reward). 

I hope you look into it more (here’s a good piece covering the Barbell and Nassim Taleb’s strategy) – especially if you’re a speculative macro-trader like I am.

PS – if interested in the barbell portfolio and how I’ve used it to outperform the market while limiting my downside ~ check out Speculators Anonymous: Premium