As the title suggests, this investing strategy separates your investment portfolio into two categories, core and satellite. Built upon academic research, asset allocation has consistently proven to be the greatest factor in determining a portfolio’s investment outcome. Essentially, the old adage of buying low and selling high might only have minor influences in terms of your investment returns over the long run. Similar to the 80/20 rule, this strategy combines two complementary approaches in investing.
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This strategy can be as risk-averse or risk-seeking depending on your individual investment objectives. The aim of this strategy is to spread your investment risk in a way that provides an opportunity to beat the index or a particular benchmark but reduces the volatility of your portfolio.
There are various theories on how to put together a core-satellite portfolio. In essence, the bulk of the portfolio consists of the core holdings. They are asset classes that are fundamental to generating long term positive returns with relatively low risk and offer broad exposure across all sectors with sufficient liquidity. This major portion of the portfolio should be left untouched, with exceptions for the need to rebalance or if your investment objectives have changed.
Satellite funds, on the other hand, take a smaller position in the portfolio. Despite a smaller size, the satellite investment pick offers a more dynamic approach. These investments can be more specialised or targeted to a particular sector, held for a shorter term as “play money” and can potentially offer more aggressive capital growth than traditional assets. These can also be investments made outside the norm, say emerging markets in the Asia market, ESG sector, or small cap stocks. You have the flexibility to move in and out of positions depending on various circumstances.
With market volatility through the roof, a core-satellite approach can be seen as an efficient method to design a portfolio that can be tailored to your liking. You can do this by purely using ETFs, a mix of international shares, or even using the mix of commodities and cryptocurrencies. It’s a ratio that has been proven to work. Lesser than 5% of companies on a stock market are accountable for the excess returns comparing to the Treasury bill (source). By making lesser investment decisions and only buying a high conviction stock, you are essentially staying within your circle of competence and this will help produce exceptional returns.