What is a 'Dumbbell'

A dumbbell or barbell investment strategy involves buying short- and long-term securities with varying maturities to provide steady, reliable income.

Breaking Down 'Dumbbell'

A dumbbell method can be used to take advantage of the best aspects of short-term and long-term bonds. In this strategy only very short-term and extremely long-term bonds are purchased. Longer-dated bonds typically offer higher interest yields, while short-term bonds provide more flexibility. The short-term bonds give an investor the liquidity to adjust investments every few months or years. If interest rates start to rise, the shorter maturities allow an investor to reinvest principal in bonds that will realize higher returns than if that money was tied up in a long-term bond. The long-term bonds give an investor a steady flow of higher-yield income over the term of the bond. Not having all their capital in long-term bonds limits the downside effects if interest rates were to rise in that bond period.

How to Employ a Dumbbell Strategy

The dumbbell method typically outperforms the stock market, so a bond investor has the potential to earn more regular income than in equities. This takes advantage of higher interest rates and minimizes risk without limiting financial flexibility. Because some securities mature every few years, the investor has the liquidity required for large purchases and emergencies. Putting part of a fixed-income portfolio in long-term bonds reduces the risk of increasing interest rates that affect the value of securities with longer maturities.

Once initiated, a dumbbell strategy must be actively monitored to acquire new bonds to replace mature bonds and to continue to provide regular income. An investor may have to wait for other securities to mature before employing a dumbbell approach. Monthly income is not guaranteed to reach an investor’s goals. Purchasing multiple bonds is more expensive than purchasing one, and potential returns may not justify the additional cost. And, risk is not eliminated completely.

In equities, a dumbbell investing approach would be to buy the three top-performing sectors and three bottom-performing sectors from the previous year. Combining a momentum strategy of owning the top three sectors with a value approach of buying the bottom three can yield more favorable returns versus than a buy and hold strategy, depending on the market. In the expanding universe of exchange-traded funds (ETFs)​​​​​​​, the dumbbell approach can be attractive as well. However, trading costs, taxes and management fees may increase with a dumbbell approach due to more frequent investment turnover resulting in more commissions. It could also lead to more taxes on capital gains unless used in a tax-sheltered account such as a registered retirement savings plan (RRSP​​​​​​​) or tax-free savings account (TFSA​​​​​​​).

RELATED TERMS
  1. Bond Ladder

    A bond ladder is a portfolio of fixed-income securities in which ...
  2. Extendable Bond

    An extendable bond (or extendible bond) is a long-term debt security ...
  3. Discount Bond

    A discount bond is a bond that is issued for less than its par ...
  4. Bond Yield

    Bond yield is the amount of return an investor will realize on ...
  5. Bond Laddering

    A portfolio management strategy and model for investing in fixed ...
  6. Straight Bond

    A straight bond is a bond that pays interest at regular intervals, ...
Related Articles
  1. Investing

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
  2. Investing

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
  3. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  4. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  5. Investing

    The barbell investment strategy

    The barbell strategy is standard conventional wisdom offered regarding modern portfolio theory, to strike an acceptable balance between risk and reward.
  6. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
  7. Investing

    Corporate Bonds for Retirement Accounts

    Corporate bonds are usually the preferred choice in retirement accounts. Here are some of the benefits of corporate bonds, and strategies for a portfolio.
  8. Investing

    Will Bond Fund Returns Suffer if Interest Rates Rise?

    When the Fed decides to raise interest rates again, bond fund returns could suffer in the short term. But some say the impact may not be all that severe.
  9. Investing

    Find the Right Bond at the Right Time

    Learn about the types of bonds you should consider investing in, when you should be buying them and how to compare yields against their time to maturity.
Trading Center