Consider the barbell investing strategy

Investors who feel like they are to face future uncertainties in the market will often switch their portfolios to a barbell strategy. This is often done by investors who anticipate future substantial impacts on their stock market performance.

When we experience sell-offs in the market, they tend to raise the anxiety level of the average investor, reigniting fears of a severe and prolonged price decline. In reality, sell-offs are a healthy part of the stock market, since after a dramatic price pullback comes a recovery that usually morphs into a higher high than economists normally would have predicted. That being said, when investors are forced to contend with volatile markets, it is always recommended to use a barbell investment approach.

A barbell investment strategy combines high-quality dividend payers and high-quality growth names equally and can be a valuable approach in any type of environment — especially given the current “lower for longer” interest rate road the U.S. Fed and the Bank of Canada have put in place. Barbell strategies typically outperform during volatile periods and limit losses during market declines, but they also provide one more thing: an attractive longer-term return and risk profile relative to the overall market.

Here's how to approach this with your adviser: Equity investments are used with high-quality dividend-paying stocks on the “defensive” side of the barbell and then high-quality growth-exposure stocks are on the “aggressive” side of your portfolio. One of the most attractive attributes of a barbell strategy, from a historical performance perspective, is the ability to limit losses during market declines, while also participating in the upside during periods of market strength.

The past 18 months, we have all been on a roller-coaster in the financial markets and, given the hectic and unprecedented nature of investing these days, I now believe that pairing dividend-paying stocks with some of the higher-growth ones is the best way to implement a more conservative retirement strategy for the long term. Talk to your adviser and see if this is something you could consider when saving for your future.

I still believe we are in the beginning of a bull market. Investors should not be overly concerned about sell-offs and upticks during emotional market volatility this fall. Also, a word to the wise: September historically has been the worst month for U.S. stocks from a performance standpoint, with the S&P 500 logging an average loss of 0.6 per cent going back to 1945. Do not be surprised if your portfolio struggles a little at the end of the summer. Third-quarter results tend to exhibit weaker price returns historically.

Think of this as an upcoming “sale” to buy good high-quality stock. Top up your RRSP or TFSA. October, November and December are typically among the best months of the year in terms of price performance with the S&P 500, and historically average gains of one per cent to 1.6 per cent during these last months of the year. Plan to invest, and invest in your plan.