Building Your Portfolio: Core-Satellite Strategy Demystified

A Core-Satellite portfolio approach breaks down an investor’s portfolio into two main components: the “core” index funds and the “satellite” active components.

The core typically consists of a broad-based market index or a diversified fund that seeks to mimic the returns of the whole market or a benchmark. This core is expected to provide diversification and represents a large chunk of the portfolio.

The satellites are a collection of more specialized investments. These might include individual stocks, sector-specific funds, or other assets that offer the potential for higher returns (and, conversely, higher risks). The satellite components are designed to complement the core. Thereby giving the portfolio a chance to outperform the market while still maintaining a high level of diversification.

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Why Use a Core-Satellite Approach?

The Core-Satellite approach attempts to capture the best of both passive and active investing. And, it satisfies our psychological urge to try to beat the market. Since, most investors have a tough time accepting the completely passive index fund portfolio. A Core-Satellite strategy allows investors to balance their desire for higher returns with the practical reality that beating the market average is unlikely.

By having a solid, stable core, investors are ensuring that they have a reliable source of returns that tracks the market. The satellites, being more specialized, allow for targeted growth opportunities and a chance to outperform the market.

Pros and Cons of Core-Satellite

• Remain diversified: By holding a broad-based core, investors maintain a diversified base which can reduce the overall risk of the portfolio.
• Chance to outperform: The satellite investments, while riskier, offer the potential for higher returns. If chosen successfully, they can enhance overall portfolio performance.
• Feel some agency: For those who desire control over their outcomes, picking satellite investments can be fulfilling. As it offers a degree of personal agency in the investment process.
• Costs: The core, typically being an index or a passive fund, is generally less expensive in terms of fees. However, when choosing satellites, one can opt for a self-directed approach (essentially free, save for trading costs) or employ an active manager, which can add to the fees.

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Portfolio Example: S&P Core, Individual Stock Satellites

Name	Symbol	Allocation %
S&P 500 Index	SPX	70%
Apple Inc.	AAPL	5%
Tesla Inc.	TSLA	5%
Amazon Inc.	AMZN	5%
Microsoft Corp.	MSFT	5%
Alphabet Inc.	GOOGL	5%
Netflix Inc.	NFLX	5%

Portfolio Example: S&P Core, Active sector manager

Name	Allocation %
S&P 500 Index	70%
Software Sector Active Fund	10%
Healthcare Sector Active Fund	10%
AI Focused Active Fund	10%

Why is the Core-Satellite Approach Popular?

The core-satellite approach offers a balanced way of investing. Combining the stability and low costs of passive investing with the potential higher returns of active investing. It’s a way for investors to have their cake and eat it too, so to speak. By safeguarding a significant portion of their assets in the core. And then, taking calculated risks with the satellites, investors can aim for market-beating returns without exposing their entire portfolio to undue risk. This balance between risk and reward, combined with the flexibility it offers, makes the core-satellite approach popular.

We invite you to contact us, or schedule a complimentary review of your situation, to explore how we can assist you in navigating the investment landscape with confidence and clarity.

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