Beyond ‘Buy and Hold’: 4 Investment Strategies You May Not Have Heard Of

When it comes to investing, there’s no shortage of advice on what to buy. But how you invest matters just as much. Beyond familiar approaches like “pay yourself first” and “buy and hold” are plenty of strategies designed to help investors manage risk, stay disciplined and navigate uncertain markets.

We look at four methods you might not be familiar with, and how they could help or hinder your portfolio growth.

Barbell strategy

If you’re a regular gym goer, you’re no doubt familiar with the barbell – that long metal rod with weights on either end. Well, the barbell isn’t exclusive to strength training, it’s also a potentially powerful investment strategy.

In this context, a barbell refers to dividing a portfolio between conservative and riskier assets. For example, in a stock portfolio, you might have blue-chip, dividend-paying stocks on the low-risk side and growth stocks in sectors such as early-stage technology on the higher-risk side.

The barbell strategy was described by statistician and former derivatives trader Nassim Nicholas Taleb in his 2007 book, The Black Swan: The Impact of the Highly Improbable. His version may sound extreme: combining a large position (85 to 90 per cent) in very safe assets such as Treasury bills with a small position (10 to 15 per cent) in highly speculative assets such as options.¹

Taleb’s aim was to protect against big market declines, such as from “Black Swan” events, which are outliers with extreme impact (financial crisis or a pandemic), while still leaving the potential for uncapped gains.

Taleb’s model isn’t for most investors, but other types of barbell strategies have also emerged, such as:

• Short-term bonds and long-term bonds
• Small caps and large caps
• Growth stocks and dividend/value stocks
• Global stocks and domestic stocks

In the case of a bond barbell, short-term bonds mature sooner but generally pay less while long-term bonds carry interest-rate risk.

One thing to watch: avoiding medium-term bonds could potentially mean missing out on better returns than those of short-term bonds.²

This strategy requires active market monitoring and regular rebalancing. Before implementing this strategy, investors should understand the costs and risks involved. 

Bullet strategy

This is a fixed-income strategy where investors buy bonds at different times – say, over a period of four or five years – that will mature at the same time. It’s often used by investors looking to raise a lump sum of cash for a future purchase,³ such as buying a house, financing a child’s post-secondary education or funding their own retirement.

Buying bonds in a staggered fashion can help investors mitigate interest-rate risk. This strategy is called a bullet because of how it looks on a chart when all of the different bonds come together at a single point in time, similar to the point of a bullet. It’s not the same as a bond-laddering strategy, where bonds mature at different times to provide continuous cash flow.

The bullet strategy can be beneficial when interest rates are high and expected to fall, since investors can secure higher yields for longer. The downside is the lack of liquidity (as the money is locked in) as well as the risk that when rates drop, funds may have to be reinvested at a lower yield.

The Rule of 42

The Rule of 42 is a broad diversification strategy where investors own at least 42 different “positions” or assets in their portfolio so that cash comes in from a variety of assets, equity types and sectors. Under this approach, a single security can only make up two to three per cent of the overall portfolio.⁴

The goal of the Rule of 42 is to protect against major losses in a single stock or sector. Its creators believed the “sweet spot” was to hold 30 to 50 positions, and they settled on 42 (rather than 40, to avoid confusion with an existing, unrelated rule).

However, the strategy could also limit portfolio growth if a particular stock or sector outperforms. Investors using this strategy will also likely want to rebalance their portfolios regularly to maintain the right mix, which requires time and discipline.

The Rule of 42 is sometimes combined with the Rule of 25, where at least 25 per cent of dividends are reinvested into the portfolio.

The 3-5-7 Rule 

This strategy can help investors reduce risk in their portfolio by setting limits for the securities or other assets they buy. There are different versions of the 3-5-7 rule, but here are some interpretations:

• 3: Less than three per cent of a portfolio should be allocated to a single trade.⁵ This could help protect an investor’s assets if a stock sees a big drop.
• 5: Depending on who you ask, this can mean limiting total exposure across all open positions to less than five per cent,⁶ or the maximum exposure to one stock or sector.⁷
• 7: Again, this can mean different things: targeting profits of at least seven per cent on winning trades with the goal of improving the risk-reward ratio,⁸ or limiting total exposure across all positions to seven per cent.⁹

Put new strategies into perspective

These niche strategies show that investing isn’t just about choosing the right stocks or ETFs. It’s also about deciding how to manage risk, respond to changing market conditions and structure a portfolio. While these approaches may be better suited to more experienced investors – and there are different interpretations for how they work, which you don’t see with more established approaches – understanding the range of strategies available can help you make more informed investing decisions. Before trying any strategy, consider whether it aligns with your risk tolerance, time horizon and financial goals and needs.