"There's just nowhere safe to put our money where it will stay ahead of inflation."
Sound familiar? It does to me.
Several of my relatives are on the cusp of -- or have started -- retirement. Naturally, they want a safe place to put some cash. But with money-market funds stuck at a 0% return, and 12-month CDs offering up a maximum of just 1.25%, it seems almost impossible to find dependable high-yield investments.
But there might be a way around all of this: a "barbell approach" offered up by best-selling author and risk scholar Nassim Taleb -- who warned of the 2008 banking crisis before it happened -- in his Antifragile: Things That Gain From Disorder.
The barbell approach: Applicable to retirees and nonretirees alike
Before being called out in the comments section, it's worth stating that I'm only in my mid-30s, and still have decades before I start collecting Social Security. Take that for what it is.
But if you're skeptical, know that I've got skin in the game.
Though it's not our nest egg, my wife and I have both an emergency fund and home-savings fund that's been 100% in money markets for over eight years now. We're losing buying power. Unsure of when we may buy a home, and wanting to safely grow our stash, we're adopting the barbell approach. This isn't that different from how a retiree would view his or her portfolio.
To have a barbell approach, Taleb suggests that investors put 85% to 90% of their assets in extremely safe investments -- like short-term bonds -- and the other 10% to 15% in highly aggressive, speculative plays.
The safe money sets a barrier for how much money you can lose -- for example, if you put 15% of your money in speculative plays and none of them pan out, you still have 85% of your capital.
On the other hand, your speculative plays are likely have unlimited upside. For Taleb, such plays would likely take the form of options. Since I'm not an expert in the field, I'm more comfortable making speculative bets on a long-term, buy-to-hold approach of small-cap stocks.
Ideally, I'd like to spread these speculative bets across 10 or 15 different investments, with a small amount of cash dedicated to each one. While most of these investments might fail or go absolutely nowhere, if even one or two become big winners, they will push the overall portfolio much higher.
Consider the speculative part of your portfolio: 10 stocks each getting a 1.5% allocation. After three years, eight of the investments go to zero, one doubles, and one becomes a 20-bagger (+1,900%). You'd be sitting on an 18% gain for your total portfolio, which isn't bad at all given the ultrasafe method you chose in keeping 85% of your money in cash equivalents.
What would a speculative play look like?
Obviously, this strategy isn't for the faint of heart. In fact, it may be best for those nearing retirement to simply test out the strategy with very small sums, and get comfortable with the process before allocating anything near 10% of their portfolio.
I have yet to choose all 10 or 15 speculative plays that my family will be investing in. But they will all have a few key similar traits:
- A stock with a market capitalization of under $2 billion.
- Management with significant skin in the game -- preferably owning over 10% of the company.
- Ideally, a founder-led company, or one that still has the founder involved.
- A sound company culture, which can be checked via Glassdoor.
- Evidence of optionality.
One example of a company that meets most -- though not all -- of these criteria is Organovo (NASDAQ:ONVO). The company makes human tissues that function the same as native cells. Drug companies use these tissues to test for toxicity before they enter the clinical stage.
Take a look at how the company fares against my five traits:
- A market capitalization of just $350 million.
- The company's executives and board members own 10.6 million shares, or 13% of the company.
- Dr. Gabor Forgacs, scientific founder of Organovo, is a scientific advisor to the company.
- Organovo only has two reviews on Glassdoor, so it's difficult to draw any conclusions on the company culture.
- Earlier this year, Organovo announced that it was focusing on becoming a mini medical conglomerate, showing a great deal of optionality for the future.
It's entirely possible that this investment will go nowhere. But I'm prepared for that. All I can control is the process by which I select these companies and hope for the best. And since this represents just a small portion of my family's "cash" holdings, we could weather the storm just fine if Organovo goes bust.
For soon-to-be retirees looking for ways to boost the overall yield of their investments, tinkering with the barbell strategy is at least worth considering.