What it is
The barbell strategy is an approach for investing in fixed-income assets (like bonds and time deposits) that involves putting money in long-term and short-term assets, but not medium-term ones.
It’s called a barbell because the maturities sit on extreme ends, creating a barbell shape.
What it means for you
Fixed-income investments tend to be affected by interest rate changes. When the key interest rate goes up, bond prices tend to fall because newer bonds will offer higher rates. The opposite is true when the key rate goes down.
There’s no guarantee of what might happen with interest rates and so having both long- and short-term debt securities may help you manage risk while maximizing earnings.
Short-term assets mature in a year or less, giving investors the chance to reinvest the proceeds sooner. This can be a good thing if interest rates have gone up and you can take advantage of higher fixed earnings.
Meanwhile, long-term securities that mature in 10 years or more usually offer a higher yield than short-term ones. This is to compensate investors for the length of time their money will be locked in.
If interest rates increase, you might miss out on higher earnings if your money is invested in a long-term asset. If they go down, your money is locked in at a higher rate.
There are other methods of investing in multiple fixed-income assets to possibly minimize interest rate risk. These are the laddering and bullet strategies.
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