Definition
The term barbell strategy refers to an investment approach involving the purchase of fixed income securities with both long and short term maturities. The barbell strategy typically applies to bonds, and is thought to provide the investor with a portfolio that balances risk and reward.
Explanation
The barbell strategy involves the purchase of fixed income securities that are evenly split between bonds of long term and short term maturities. The approach is thought to provide the investor with a balance of risk and reward. The best time to employ the barbell strategy is when interest rates are on the rise. The long-term bonds will provide the investor with a stable source of income, while the short-term bonds allow the investor to capture higher rates of interest. If interest rates happen to fall, the value of the long-term bonds increase.
In practice, short-term bonds are those with maturities of three years or less. Long-term bonds should have a maturity of ten years or more. Since the short-term bonds are constantly maturing, this approach is not well-suited to the passive investor. As the short-term bonds mature, the investor must roll these over into new short-term investments.