Written by Alex Seleznev, MBA, CFP®, CFA | Feb 7, 2024
For many, a traditional approach of investing in a diversified portfolio of stock and bond funds is likely to be an acceptable option. If you are looking for a more sophisticated approach to potentially improve your long-term investment results without sacrificing portfolio stability, consider the Core-Satellite approach.
At the basic level, this approach is rather simple.
There are two primary objectives for a Core-Satellite portfolio: to increase (1) growth or (2) income.
Regardless of the objective, close to 70-90% of the total portfolio is normally maintained in the “Core” allocation that consists of funds that have relatively predictable performance results.
The remaining funds, the “Satellite” allocation, usually between 10% and 30% of the total, consist of sector funds, individual stocks, or other types of investments that are designed to achieve your individualized investment goals.
Fair warning!
Most non-professional investors are not likely to implement this approach correctly.
You need a strong understanding of how different investments interact with each other to ensure that you are actually achieving the desired goals, meaning increasing your potential returns (or income) without sacrificing too much of the portfolio stability.
Poorly implemented portfolios under the Core-Satellite approach tend to significantly overweight one or two sectors, such as technology.
Instead of improving the risk/reward ratio of the portfolio, they make it even worse when compared to a typical diversified investment mix.
You need to have a clear understanding of what you are doing or work with a professional who is able and willing to spend the time to design the right investment mix for you.