Barbell Strategy: Manage Risk and Profit from Market Turmoil

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Nassim Taleb uses the barbell strategy to manage his financial risk. How can this help e-commerce owners? It helps to understand the larger picture.

Taleb coined the term “Antifragile” in his book of the same name. We understand the meaning of “fragile” well enough. We know what it means when a package bears that label – it cannot withstand rough treatment or adverse conditions.

To be “antifragile” is the opposite. When something is antifragile, it will benefit from these conditions. An example Taleb offers is the mythological creature, the Hydra. Each time one of its many heads was cut off, two more heads grew in its place.

Hydra - representing the barbell method of investing

If we want our finances to be antifragile, we not only need to survive tough conditions, we need to be in a position to profit if things go bad around us.

What is the barbell strategy?

Picture a barbell in your hands. On each side of it will be a concentration of mass, the weight of the barbell comes from the ends. There’s not much going on in the middle.

For Taleb, it makes sense to keep 90% of his money in very safe investments, such as treasuries or cash. The other 10% is invested in high-risk investments that might pay off big. The high-risk investments might also crash. If they pay off, the gains more than compensate for the low returns of his safe investments. If they go to zero, he’s still safe. He lives to fight another day.

One aspect of the 10% side of the barbell strategy is that it might in fact do very well when other parts of the financial system don’t. Taleb might use options for this, and we might as well. If we consider our e-commerce stores as an asset class, however, we can think about this differently.

How the Barbell Strategy Benefits E-Commerce Business Owners

As e-commerce owners, we already have a concentration of our assets on the riskier side of the barbell. We’d be wise to consider ways to bolster the other side to offset our risk. Often, our portfolios look similar to almost anyone else’s. Except for perhaps our retirement accounts, we should rethink this.

Why? What happens in a market downturn? Sales might slow down. We might panic. We might have to sell our investments to get through. Sounds like the road to being fragile.

It’s more than playing defense

What might happen if our barbell strategy is in place? Not only will we likely have no problem weathering the storm, but we might also be able to pursue some strategic advantages in our business.

For example, if our data tells us that traffic is still strong enough to expect sales, we might buy up inventory as our competitors are in crisis mode. We might double down on ads at a time when others are dialing back.

We might find opportunities to acquire other businesses whose owners need capital. Their fragility might allow you to acquire their store at a discount.

What should make up the safe end of the barbell?

At the time of my writing this, inflation has been reported at 6.8% from 2020 to 2021! So it makes sense to push back on this idea a little. Taleb’s use of treasuries isn’t out of the question. Remember, you are optimizing for the overall health of your portfolio, not singling out the performance of only one side.

While inflation would hurt you some here, even holding cash makes sense. Remember, the riskier side of the barbell should be working for you. Your business should offset the impact of inflation on your safer assets. What’s nice about the barbell strategy is that you can flip the mindset of keeping cash as a cost of doing business to the belief you are keeping some dry powder to take advantage of opportunities that might otherwise hurt you.

You might be able to buy up inventory or ads at a time when your competition is vulnerable. You might be able to acquire your competitors’ stores themselves!

I’m an e-commerce business owner and financial advisor. Need help developing a risk management strategy? Schedule a free consultation or email us.

Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Allan Phillips, and all rights are reserved.

Allan PhillipsAllan Phillips is a Certified Financial Advisor (CFP®) and founder of Tree Street Advisory. He works with E-commerce business owners and Physicians who are concerned with issues such as cash flow management, high-earner retirement planning, debt repayment approaches, tax strategies, and business planning.


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