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Adam Grossman recently wrote a good piece about “barbell” strategies.
A barbell—literally—is a metal bar with weights on each end like you see in a gym or an old Popeye cartoon. There are no weights in the middle, just on the opposite ends.
In investment terms, a to implement a barbell strategy is to overweight assets at opposing ends of the spectrum. A common approach is to create a barbell of bond funds with short-term maturities and those with long-term maturities and not much in the middle. That’s an alternative to another common strategy of mainly investing in the middle—intermediate-maturity bond funds.
But you can do something similar with stocks. I recently created a sort of barbell with small-cap value and large-cap growth funds. (Although I do still have a lot in between, including in broad index funds.)
Readers may recall my unfortunate predilection for small-cap value. I say unfortunate because the relative performance of cheap small stocks has trended down for nearly 15 years, despite their outperformance over longer periods. Over 15 years, the Vanguard 500 Index Fund is up more than 681% while Vanguard’s small-cap value index offering has gained just 471%. On an initial $100,000 investment, that’s a crushing shortfall of $210,000.
I’m too close to retirement to risk that kind of opportunity cost by betting too heavily on one segment of the stock market. Yet I have a gain in the Vanguard Small Cap Value Index ETF (symbol: VBR), which is in a taxable account. I don’t want to incur capital gains taxes just to reduce small-cap exposure when small-caps could be poised for a bounce back.
But I’ve been feeling real pain in the past few years.
I finally decided to hedge my bets. In March, I shifted some money from a total market index fund in a retirement account to the Vanguard Growth Index ETF (symbol: VUG). My position is about half of my position in the small value fund, so it’s an uneven barbell. Compared to the world stock index, I’m still underweight in stocks like Apple, Microsoft and Nvidia, which I want to be.
It’s been a psychologically positive move. When I look at my portfolio, one or the other side of my barbell is doing well. Small-cap value outperformance vindicates my overweight; continued large growth dominance makes me feel relieved that I hedged my bets.
Taking such an approach means I have less weight in the middle—all the stocks in between small value and large growth. I risk not fully participating in a large-cap value or mid-cap move, for instance.
But until I can take profits in small-cap value with more limited tax impact—such as after I retire—and put the proceeds into my index funds, the barbell approach works for me. Given my worries about small value’s underperformance, the barbell strategy has—ahem—taken a weight off my shoulders.
I’d be interested to see your returns using the barbell method compared to simply using (VTI) Vanguard Total Market etf
FYI : We are personally
50% (VTI) Vanguard Total Market etf ,
25% (VT) Vanguard Total World ETF ,
25% (VUG) Vanguard Growth etf
For us it’s about simplicity that we are comfortable with
Looking for some HD input on my impending retirement at the end of 2025. I will be pulling out a significant sum from my Employer’s 3rd party managed retirement fund and rolling over to a Traditional IRA that I will self manage. I will be 64 when I officially leave full time employment. Here are my specific questions:
1) I am looking for a simple strategy for reinvestment of these funds and considering a balanced distribution into a) S&P 500 ETF (IVV, VOO) b) Dividend ETF (VNQ,SCHD) c) Higher Yielding Covered Call (JEPI, JEPQ) and d) Money Market. What am I missing with this strategy? I will not be using these funds until a decade out from my retirement date 2035-6
2) Roth Conversions – I will not have any W2 income for year 2026 and thinking of converting portion of this Traditional IRA to Roth for legacy giving and inheritance. Recent input mentions doing this over 5-6 year period for paying the taxes and prior to receiving Social Security. Looking to validate or challenge this strategy?
I am grateful for the collective wisdom and insight in this next season of life and the input of the HD community
Best
Kevin Cady
B and C provide income, but I would use bonds instead as they’re not as highly correlated with A. For Roth conversions I would target an income, capital gain, or IRMAA bracket and convert up to the top.
In reference to Jonathan’s comment about overlap, there is a tool available if you’re not aware of it, that checks the overlap between two funds. If you do a free registration, you’ll get more data in the results.
https://www.etfrc.com/funds/overlap.php
1) I’d look at the overlap among the first three funds you mention. Yes, they have somewhat different strategies, but it looks like you’ll be mostly getting exposure to large-cap U.S. stocks. What about small-cap U.S.? What about foreign stocks?
2) Roth conversions prior to claiming Social Security can be a smart move. But I’d also pay attention to the impact on your Medicare premiums a.k.a. IRMAA. The Medicare premium surcharges are a cliff penalty, so $1 over each threshold can result in the full surcharge for that bracket.
Interesting Bill. I gather that if there were no capital gains to pay, you’d shift from your small cap value overweight to a broad index even though small cap value remains the most undervalued segment of the total market. But it also sounds like you would do so reluctantly. Perhaps the CG impact is doing you a service by causing you to endure the pain and wait?
Interesting strategy, Bill. Since you implemented your barbell, do you feel like large growth and small value tend to move in different cycles, with large growth suffering on days when small-cap value fares well, and vice versa? And on big days for either, is the other one often the stock market style box that does worst?
For sure—they tend to be opposites except during “everything rallies.”
The growth leaders seem to be viewed as havens when interest rate worries or recession concerns resurface, and small value often responds well when those fears recede.
I loved your post on the barbell strategy, I myself have made a similar move. My portfoliis largely invested into the following:
Overall my portfolio offer a reasonable risk and return, even during awful recessions and flat periods in the market:
As I get closer to retirement I may tone down the risk, and probably return, by moving to 1/3 in TIPS instead of high yield if my pension and social security does not provide sufficient support. If my pension and social security are large enough I might just bear the risk so that I can leave it to inheritors. It is nice to see someone else split their portfolio’s equities between VUG and VBR.