Saturday, February 4, 2012

A falling barbell can crush you

Finally, I have a name for how I approach my investments. It's the risk barbell approach. I saw the term used in an article in The Globe and Mail. Rob Carrick talked with Sheldon Dong, vice-president of income strategy at TD Waterhouse, about how he managed his own retirement portfolio. He confessed he uses the risk barbell strategy.

“I do the extreme risk barbell,” he said. “I don’t recommend that for the average client, but you get the idea.”

Mr. Dong describes his risk barbell as a simple, if decidedly non-traditional, alternative. He’s careful to offer the warning that “what I’m preaching is not what the firm [TD] is preaching.” But if you’re desperate to wring better returns from your portfolio without a massive spike higher in risk levels, the barbell is worth investigating. 

I like this fellow's attitude.

I don't have any investment directly in bonds, the yields are simply too low. If I had to live in retirement on the return from bonds, I'd be in deep doo-doo immediately. I do have almost 30 percent of my money in two monthly income funds: the TD and the CIBC monthly income funds. These two mutual funds have a good chunk of their money in bonds and so I, too, have some bond exposure.

I also have a lot of blue chips investments. Plus, I have some money in utilities and the energy industry. I have great confidence in all the above. They may dip but they will always, in my estimation, come back and while one is waiting for the upward bounce there are the dividends to comfort the investor.

But, these "safe" investments are not enough to yield the return that I need. This is where I enter the risk barbell territory. I own some REM and some DRW and some other high yielding ETFs. I see high yield as almost synonymis with increased risk. This is not always the case but often enough that it is a pretty good rule.

Can I afford to lose the money invested in my high yielding ETFs? Yes. Oh, it would not be comfortable but I'd survive. I can mentally handle the risk. In fact, I have slept better at night since my retirement knowing that I had that income than I would have if was just squeaking by financially.

Come up with your own risk barbell. But be aware, a falling barbell can crush you.

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