What is a Core-Satellite Portfolio?
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.
Why would an investor 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.
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% |
What makes 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.
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