Picking individual stocks can be difficult for the average investor. While some stocks outperform the market’s return in any given year, it’s usually only a handful that generate the bulk of the market’s gain.
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One strategy that’s not often discussed is picking stocks using a barbell approach of both winners and losers from the prior year. While requiring a bit of legwork, the extra effort could pay off for investors in 2025 — here’s how.
Start With Winners and Losers From the Prior Year
While there are many types of barbell strategies, one that could pay big dividends is to invest in a portfolio that combines big winners and big losers from the prior year. The theory behind this strategy is twofold.
First, momentum investing is a real thing, and stocks that have performed well in one year often maintain investor interest into the following year. Second, some stocks that have significantly underperformed the market often bounce back.
The barbell strategy aims to benefit from both of these market tendencies.
As the market tends to overshoot both on the upside and the downside, some quality stocks that simply had a bad year or disappointed investors in some manner get unjustly punished, selling off far below their intrinsic value.
On the plus side, some momentum winners have the stamina to run year after year. In 2024, Nvidia (NVDA) was the top-performing stock in the Dow, but that perhaps shouldn’t have been a surprise to investors. The company has been the top performer in the entire S&P 500 for the past five-, 10-, 15- and 20-year periods, per Visual Capitalist.
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Screen Out True Losers
Of course, simply picking the top and bottom performers of the market as a whole may not get you the results you desire. You’ll still have to do some legwork and screen out obvious outliers.
For example, for purposes of the barbell, you’ll want to avoid both winning and losing stocks that are tied to a single product or commodity. A biotechnology company with its hopes pinned to a single product in development may find itself booming or busting at any time. This type of speculative investment doesn’t work in the barbell strategy.
To help screen out these types of wild outliers, consider limiting your search to stocks in the Dow Jones Industrial Average or the S&P 500. For 2024, the best- and worst-performing stocks in the S&P 500 were Palantir (PLTR), up about 350%, and Walgreens Boots Alliance (WBA), down nearly 65%, per The Wall Street Journal. In the Dow, those titles fell to Nvidia (NVDA) and Boeing (BA), respectively.
As you can see, limiting your search in this manner keeps you in the universe of large companies with proven business plans. While Walgreens and Boeing are certainly knee-deep in their own struggles, they are not fly-by-night companies. With the right management and a few breaks, investors may look back and wonder how shares ever got so cheap.
Variation: Use Industries Instead of Individual Stocks
One variation of the barbell strategy is to use winning and losing industries rather than picking individual stocks. The same philosophy applies. The best sub-industry may be on a roll, while the worst may be so out of favor that it is ready for a bounce.
Using industries rather than individual stocks can take some risk off the table for investors as well, as industries by definition can’t go out of business. If you make the wrong call on a losing industry, for example, you may lose some money, but you’ll likely still be in the game.
Caveats
No strategy works without fail year after year. If you used the barbell strategy in 2024, for example, you might have found yourself with the short end of the stick again. According to Bespoke Investment Group, the worst-performing stocks of 2023 were also all down in 2024, Seeking Alpha reported.
This is why it pays to take the time to do your own research as to why certain stocks are down. If there are one-time problems but the company is making positive changes, it can be a candidate for the barbell. But if it’s clear that a business is heading for bankruptcy, it’s your job as an investor to steer clear.
Other Types of Barbells
The winner-loser barbell strategy is just one variation on a number of barbells investors can build. Other options include blending portfolios of growth and value stocks, large cap and small cap stocks, and domestic and foreign stocks.
The idea is to balance out risk in a portfolio while still capturing upside potential.
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This article originally appeared on GOBankingRates.com: This Unique Investment Strategy Could Set You Up To Build Wealth in 2025
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