All investments are about weighting risk and reward. Core/Satellite investing is too, perhaps even more so than other types of portfolio management.
At its core – excuse the pun – is the weighting of passive, lower risk investments and more actively managed, higher risk investments.
Typically, this is a strategy preferred by high net worth individuals who can split their investment without compromising on the central principles of Modern Portfolio Theory, the Nobel Prize-winning strategy that sits at the heart of what Stockspot does.
That means diversification, risk management and a preference for index funds such as ETFs over traditional shares as a core, with more bespoke investments, selected by the investor, as satellites.
These satellites can be more actively managed and more tolerant of risk, because they are only a small part of a wider portfolio that is broadly designed to be risk averse and grow slowly but surely over time.
What is core investing?
The idea of Core/Satellite investing is that you have a core part of your portfolio that is low cost, low risk, diversified and reliable over the long run.
In practice, that means portfolios that are constructed with low cost index funds such as Exchange traded funds (ETFs).
These are the investments that grind on, year after year, without ever being incredible but generally being pretty good.
Here at Stockspot, our view is that those low cost index funds are generally all that you need over the long run, and most investors can maximise their returns to grow their wealth solely through a diverse portfolio based around ETFs for growth and defensive assets to mitigate risk.
It isn’t just us, either.
Many academic and empirical studies have shown that this kind of investing is the most effective way of growing wealth over time, with passive investments that take a hands-off approach outperforming managed funds and active investment strategies.
What is satellite investing?
The idea behind a satellite investment is that it can be something within your portfolio that gives you extra potential for return on top of your core investment.
In many ways, a satellite works more like an actively managed investment strategy, where you can take control of a part of your portfolio and direct it towards a specific section of the market.
That could be an area that you think will rise, such as tech stocks, a certain asset class that you are interested in, such as crypto or commodities or even a country that you think is undervalued, like emerging markets or Chinese shares.
The intention is for the satellite to rise and produce greater returns than a solely core investment strategy, though that, obviously, comes with the concomitant risk that is associated with more active investments.
Remember, there is a great amount of evidence that suggests that it is very hard to time the market and that ultimately nobody knows what will happen, so you don’t want to be too weighted towards a strategy that foregrounds such investing.
The core remains the core for a reason.
Is Core/Satellite investing a good idea?
At Stockspot, we approach Core/Satellite investing by giving clients with more than $50,000 in their account the ability to pick themes, which are ETFs that give investors more of a tilt towards either a different sector of the market, a different asset class or a different thematic.
This allows for the investor to have a little more control without giving them the opportunity to blow up their portfolio by taking on too much risk in one area.
Core satellite investing is a nice way of building wealth while also maintaining control over how you approach your investing.
It’s an alternative to taking the fully active approach, where essentially the whole portfolio is the satellites, which isn’t something that we recommend at Stockspot as there is a lot of risk involved and not a great deal of evidence that people can do it consistently over time.
An entirely core portfolio is our preference, because the evidence backs it up, with multiple studies showing that low cost ETF portfolios tend to do the best over the long run.
View our portfolios past performance and find out how we can help you reach your long term goals.
Disclaimer: Investment in financial products involves risk. Past performance of financial products is no assurance of future performance.
This article contains general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this information, you should assess your own circumstances or seek advice from a financial adviser.
