Alternative Finance Series: Asymmetric Positions & the Barbell Strategy

Modern Portfolio Theory

Much of conventional asset allocation in the securities markets revolves around a concept called Modern Portfolio Theory. The idea is that by balancing your portfolio with proper weighting and diversification, you can mathematically gauge how much risk you are assuming relative to how much return. Leveraging this theory, conventional asset management attempts to construct portfolios based around broad-bucket investor goals (e.g., aggressive growth, balance, safety of principal, income) and time horizon (how long until they expect to withdraw or liquidate the asset). Using the principles of Modern Portfolio Theory, along with client risk tolerance, time horizon, and other related factors, asset managers may attempt to construct an ‘optimal’ portfolio based on a risk/reward ratio that should, over time and averaged out, fulfill the client’s goals.

Asymmetric Positions

Symmetric positioning would be risking $1 for the chance to make $1. Almost all positions are asymmetric, though the difference is in degree. Risking $1 for a chance to make $1.10 would be mildly positively-asymmetric. Risking $1 for a chance to make $0.90 cents is mildly negatively-asymmetric. However, most of the the conventional models are extremely negatively-asymmetric: in the example above, the investor is risking $1 for a chance to make $.08 cents.

Barbell Strategy

Popularized by trader and philosopher Nassim Taleb, and built upon premises from the Roman philosopher Seneca, the Barbell Strategy does the opposite of playing the middle ground; it lives entirely in the extremes. According to barbell thinking, the middle ground is where most problems happen because it’s impossible for anyone to perfectly predict the future, and also because abnormal times do come. So instead of investing in the middle, barbell investors are both hyper-conservative and hyper-speculative simultaneously (visualize a barbell and you can get a sense of the meaning: the weight is concentrated on the two extremes).

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Nick Gausling

Nick Gausling

Nick Gausling is a strategic business leader, author, speaker, and investor currently residing in Texas. He can be reached via NickGausling.com