Do you take small, medium, or big risks in your life?
There are certainly pros and cons to each approach.
Lower risk means you’ll sleep well at night without much worry — you’re safe. Although that low risk is accompanied by lower returns and lower levels of success — you’re never really hitting it big. Examples are simple things like working as a teacher or accountant while putting your money in high-interest savings accounts.
Higher risk means you’re making big bets, often gambling large amounts of time or money. It’s highly dangerous, but the wins are a whole lot sweeter. Here we’re talking about entrepreneurs and content creators, and investing in things like stocks and startup businesses.
As it turns out, one of the most effective and consistent risk-taking strategies is a combination of both at the same time: the barbell strategy.
How the barbell works
Nassim Taleb is one of the word’s top experts on risk, having written a few amazing books and many, many research papers about the subject. One of his most famous works is Antifragile: Things That Gain From Disorder, where he argues that an effective risk-taking strategy should strive to be antifragile: fully protected from total ruin while being exposed to the occasional unlimited upside. From this, he forms what is called the barbell strategy.
“I initially used the image of the barbell to describe a dual attitude of playing it safe in some areas and taking a lot of small risks in others, hence achieving antifragility. That is extreme risk aversion on one side and extreme risk loving on the other, rather than just the “medium” or the beastly “moderate” risk attitude that in fact is a sucker game (because medium risks can be subjected to huge measurement errors). But the barbell also results, because of its construction, in the reduction of downside risk — the elimination of the risk of ruin.”
The barbell (a metal bar that weight lifters use) is used to illustrate how we want to approach risk-taking. The main idea is that returns on investment in every area of life are non-linear, especially at the extreme ends.
Very low-risk-low-return investments, like being a teacher and investing in a savings account, are almost guaranteed. Teachers get a stable salary and are very rarely fired, savings accounts give you a guaranteed interest rate.
Very high-risk-high investments have the potential to get you obscene wins, sometimes even greater than 100x return. Someone can start an internet business like Google or Facebook with very little money out of their own pocket and invest in things like cryptocurrency. Both have the potential to return 100x or more.
Being in the middle is the worst thing since the returns on your time and money investment are terrible. If you’re in a mid-level job, such as a “manager,” you could work 80 hours a week and then at the end of the year be given a pitiful 5% raise. On top of that, you still face the risk of being fired at any time.
Being in the middle gives you risks and limitations, while you’re not even exposed to the maximum upside of a business. It’s not a good balance of risk-to-reward.
Balancing the risk with low and high, but not middle
Therefore, it’s best to stick to low risk and high-risk things in life, while staying out of the middle. Find ways to protect yourself from total ruin: a stable job, investing in guaranteed assets. At the same time, take some big risks to have a chance at the big wins: start businesses and invest in high-leverage assets. Stay away from the middle which doesn’t really keep you safe while also not really getting you any big upside.
Taleb eloquently sums this up with a simple balance of 90/10:
“If you put 90 percent of your funds in boring cash (assuming you are protected from inflation) or something called a “numeraire repository of value,” and 10 percent in very risky, maximally risky, securities, you cannot possibly lose more than 10 percent, while you are exposed to massive upside. Someone with 100 percent in so-called “medium” risk securities has a risk of total ruin from the miscomputation of risks.”
Thus, the best and most antifragile strategy is to put 90% of your investment (whether time, money or something else) into safe things that are guaranteed. The other 10% goes into things that are highly risky, but also give you a chance to win big. You’re protected from losing completely while having exposure to the maximum amount of upside.
The precise numbers of 90% and 10% are guidelines, not hard rules. If you feel like you have a higher tolerance for risk or otherwise can withstand some hits, then feel free to go for some extra risk. And vice versa of course if you prefer to play it safer. Just keep in mind the three key concepts:
- Protect yourself from total ruin — majority investment here
- Avoid the unbalanced middle — no investment here
- Go for a few high-risk-high-reward bets — minority investment here
“For antifragility is the combination of aggressiveness plus paranoia — clip your downside, protect yourself from extreme harm, and let the upside, the positive Black Swans, take care of itself…
A barbell can be any dual strategy composed of extremes, without the corruption of the middle — somehow they all result in favorable asymmetries.”
Examples of applying barbells to life
Now that we understand the fundamentals, it’s time to apply the barbell strategy to life. There are many areas, including but also outside those of career and investments that we can apply this. Here are some examples.
- While you’re in school, spend 90% of your time attending and working on your regular course work. Spend 10% of your time dropping in on random classes. One might end up being something you love
- When spending some of your leisure time, spend 90% of your time with your usual friends and family. Spend 10% of your time going to random events and meetups to meet new people. Perhaps you’ll meet a new best friend or the love of your life
- With your hobbies, spend 90% of your time on the things you already know you love. Spend 10% of your time discovering new things. Maybe you’ll find a new passion
- At work, spend 90% of your time on your regular work duties. Spend 10% of your time on learning new skills and internal networking. It could springboard you to your next job or promotion
- For your career, spend 90% of your time on your regular day job. Spend 10% of your time moonlighting something on the side like YouTube, writing, or starting a business. You’ve got a stable income with the chance to strike it big
- With investing, put most of your money in safe things like index funds and bonds. Put a small amount of money in high-risk-high-return things like individual stocks, cryptocurrency, and startup businesses. Stable retirement funding with the chance of striking it rich
- With exercising, do regular, light training most of the time. Every once in awhile, go for a max-effort session to really push yourself. This way, you won’t overwork your body and will still get the opportunity to really push yourself
- Keep it comfortable with what you eat 90% of the time to stay consistent and healthy. Every now and then 10% of the time, try something new. It’ll keep things interesting and add a bit of spice to your life
This article has been but an introduction to antifragile risk-taking. Ultimately, I hope it serves as an inspiration to take an insightful view of the world. You can play it safe while also balancing taking risks. You can protect yourself while having the chance to win big.