A 90/10 barbell portfolio allocation refers to an investment strategy where the portfolio is divided into two extreme allocations: 90% in low-risk, defensive assets and 10% in high-risk, potentially high-return assets. This approach aims to achieve a balance between capital preservation and growth. By combining high-risk, high-return assets with low-risk, defensive assets, the barbell portfolio aims to achieve diversification across risk profiles.
A barbell portfolio allocation entirely to real estate investments involves dividing the portfolio into two extremes within the real estate asset class, typically balancing between stable, income-producing properties and higher-risk, potentially higher-reward real estate investments. Equity appreciating real estate and high-cap income-producing assets represent two distinct investment categories with different risk profiles primarily due to their income generation and capital appreciation characteristics:
A typical barbell portfolio using only real property assets is as follows:
90% Low-Risk, Defensive Assets: This portion of the portfolio consists primarily of assets that are considered safe and stable, providing capital preservation and steady income. This portion of the portfolio is allocated to properties that generate steady rental income. These properties have high capitalization rates are typically located in stable markets with high occupancy rates and long-term leases. These investments provide predictable rental income streams, but much less volatility in the valuations
10% High-Risk, High-Return Assets: The remaining portion of the portfolio is allocated to assets that have higher risk but also potential for higher returns over the long term. These investments typically involve higher volatility and longer investment horizons compared to income-producing real estate. They offer potential for higher returns through property appreciation, development gains, or strategic market timing. The investors goal is to have sufficient liquidity to maintain the investment to wait for sufficient appreciation without the need for steady cash flows.