December 14, 2011: Benefits of the Barbell

Getting the fixed income part of a portfolio is trickier than the equity portion because different bonds have radically different properties, more so than the differences between stocks.

Even when drilling down to strictly government bonds, like within the Permanent Portfolio, there are still big variations in the returns of different bonds stemming from varying maturity dates.

If you pick only short-term bonds, you will see very little fluctuation in price, but a large degree of fluctuation in yield as you are constantly rolling over to newer bonds. If you pick only long-term bonds, your returns due to interest will remain relatively consistent, but the price of your bonds will fluctuate wildly.

When faced with a tough choice between two alternatives, smart investors diversify. Many investors decide to buy middle of the road bonds, generally bonds with 5-10 years until maturity, so that they can diversify away this tough choice. I understand the logic here, but I think the Permanent Portfolio offers a better solution.

Instead of buying intermediate term bonds, the Permanent Portfolio holds a barbell of extremely short and extremely long bonds. At first glance this appears to offer no material difference compared to holding intermediate term bonds, until you account for tax efficiency and liquidity.

The PP’s segregation within the bond allocation allows for surgical precision when deciding what to load into your tax-deferred accounts. Right now, LT Treasuries are yielding around 3% while T-Bills are yielding close to zero. The use of a barbell allows you to isolate the higher yielding part of the curve, placing it into your IRA first.

This year, I plan on maxing out my Roth with my LT Treasuries first, and letting my other assets overflow into taxable accounts. LT Treasuries are currently the highest yielding asset class in the Permanent Portfolio, making them the least tax efficient. Therefore, it makes the most sense to shelter them from taxes.

This tax benefit alone gives the barbell a clear advantage over holding intermediate term-bonds, but liquidity is another compelling advantage.

For the short end of the curve one can allocate a small (definitely less than 50%) portion of their taxable bonds into an FDIC insured savings account because a savings account is essentially a short-term bond fund. This is a slight deviation from Harry Browne’s recommendation of strictly T-Bills, but I think the liquidity benefit is very beneficial, especially if done in moderation and spread over multiple institutions. This year, roughly a quarter of my “cash” position is going into FDIC accounts specifically set up for my PP purposes. I see significant value in the ability to access some of my portfolio 24/7 every day of the year.

The combination of greater tax efficiency and liquidity make the barbell approach far superior to an intermediate bond fund. In fact, I can’t think of any compelling advantages to the intermediate funds. Perhaps they are easier to watch than the barbell for an undisciplined investor but for an investor who sees the bigger picture, barbells are the way to go.


  1. I think you have a great blog here.

    Your article providing an overview of the Permanent Portfolio is really outstanding.


  2. Thanks MT!

    Your posts on the infamous Boglehead thread are what started me on this path. I am very excited for the book to come out. If it is anything like your forum posts it is bound to be a great read.