Core satellite investing has become a popular portfolio allocation strategy that aims to balance risk and return. This approach combines a core holding of broad market index funds with satellite investments in specialized asset classes or strategies. In this article, we will explore the principles, benefits, and implementation of core satellite investing.
The core represents the foundation of the portfolio
The core portion is typically made up of low-cost, diversified index funds or ETFs that track major market indexes like the S&P 500. This provides broad exposure and downside protection. The core holdings make up the majority of the portfolio, generally 50-70%.
Satellites provide potential excess returns
The satellite portion targets specialized assets like small caps, foreign stocks, or alternative strategies. Satellites make up a smaller share, usually 30-50% of the portfolio. This segment aims to boost returns through tactical bets and diversification.
Allocate between core and satellites based on risk tolerance
The ratio between core and satellites can be adjusted based on an investor’s risk appetite and market outlook. More conservative investors may allocate 70-80% to the core, while more aggressive investors might do a 50/50 split or even tilt satellites higher.
Rebalance to maintain target allocation
As market movements cause asset drift over time, portfolios should be rebalanced back to target allocations. This forces investors to sell high and buy low to keep the intended risk profile.
Core satellite investing offers a structured approach to balance risk and return. The core provides stable market exposure while satellites allow customization and diversification. By combining indexing and active strategies, investors can build resilient portfolios suited to their needs.