In the world of investing, finding the perfect balance between risk and reward can be a daunting task. Amid countless investment strategies, Core Satellite Investing stands out as a versatile and adaptable approach that caters to both novice and seasoned investors alike.
In this guide, we'll follow the story of Sarah, a fellow investor, to learn how to create a killer portfolio that combines the stability of core investments with the growth potential of satellite investments. Whether you're just starting out or trying to up your investment game, we've got your back with essential knowledge and practical tips to help you achieve your financial goals.
What is Core Satellite Investing?
Core satellite investing is a hybrid investment strategy that combines two distinct approaches: a stable “core” of diversified, low-cost investments, and a selection of “satellites” that have higher potential for growth and returns. The goal is to strike a balance between stability and growth while minimising costs and risks.
By combining the stability of core investments, like low-cost diversified ETFs, with the growth potential of satellite investments, such as individual stocks and niche ETFs, investors can create a personalised and diversified portfolio. This approach caters to both new and experienced investors, allowing them to achieve their financial goals while managing risk.
Meet Sarah, a 40-year-old IT professional with a keen interest in investing. She's been exploring different investment strategies to grow her wealth over time. Recently, she came across the core satellite investing approach and found it intriguing. In this article, we'll follow Sarah's journey as she learns about and implements core satellite investing in her portfolio.
Building a Core Satellite Portfolio: Understanding the Basics
When Sarah first started exploring core satellite investing, she had several questions about the approach, such as:
- What is a core-satellite investment strategy?
- What is meant by core-satellite asset allocation?
- What is the core-satellite approach to constructing a portfolio?
At its essence, a core-satellite investment strategy involves building a stable core of diversified, low-cost investments (usually index funds or ETFs) that track the market, such as the SP500, and complementing it with a selection of satellite investments. These satellites are typically more focused, higher-risk investments with the potential for higher returns. They can include individual stocks, sector-specific ETFs, and alternative assets.
Core vs. Satellite: The Differences
Before diving deeper, Sarah needed to understand the difference between core and satellite investments. Core investments are usually low-cost, passive index funds or ETFs that offer broad exposure to the market. They provide stability and predictable returns, minimising risk and costs.
On the other hand, satellite investments are more focused and have the potential for higher returns. Examples of satellite investments include growth stocks, leveraged ETFs, cryptocurrencies or even private equity (PE) investments. The difference between core and satellite investments lies in the investment focus: core investments are usually stable, established businesses, while satellite investments are high-growth or turnaround opportunities.
The Core-Satellite Portfolio Construction Process
Constructing a core-satellite portfolio involves three key steps:
- Identifying and selecting the core investments.
- Choosing the satellite investments.
- Deciding on the allocation between core and satellite investments.
Step 1: Selecting the Core Investments
Sarah started by researching ETFs that would serve as her core investments. She looked for low-cost, diversified index funds that provided exposure to the market. She explored platforms like Raiz and CommSec Pockets for an easy-to-use concept way to do this.
Step 2: Choosing the Satellite Investments
Next, Sarah focused on selecting her satellite investments. She wanted a mix of high-growth stocks, sector-specific ETFs, and alternative investments. She considered Spaceship for its tech and growth-focused investing, and Stake for its low-cost and user-friendly app interface for US and niche ETFs.
Step 3: Deciding on the Allocation
Finally, Sarah had to decide on the allocation between core and satellite investments. She aimed for a 70-30 split, with 70% of her portfolio in core investments and 30% in satellite investments. This way, she could strike a balance between stability and growth while minimising risk.
Tracking and Managing the Core Satellite Portfolio
Once her core-satellite portfolio was set up, Sarah needed a way to track and manage her investments effectively. She discovered Sharesight, a platform that allowed her to track her investments and manage her portfolio in one place. This made it easier for her to monitor her core and satellite allocations, as well as keep track of her investment performance.
The Most Successful Investment Strategies
Sarah wanted to make sure she was adopting a winning investment strategy. She explored various approaches, including those used by successful investors like Warren Buffett. She discovered that while there is no one-size-fits-all solution, some common traits of successful strategies include:
- Diversification: Spreading investments across different asset classes, sectors, and regions to minimise risk.
- Long-term focus: Prioritising investments that can grow in value over time, rather than chasing short-term gains.
- Cost minimisation: Keeping fees and expenses low to maximise returns.
Core satellite investing encapsulates these principles, making it an attractive option for investors like Sarah.
The Riskiest Investment Strategies
While researching, Sarah also wondered about the riskiest investment strategies. She learned that some of the riskiest strategies include:
- Speculation: Investing based on rumors or short-term price movements rather than fundamental analysis.
- High leverage: Using borrowed money to amplify potential returns, which can also lead to significant losses.
- Concentrated portfolios: Investing in a small number of assets, exposing the investor to higher risk if one or more investments perform poorly.
Core satellite investing can help mitigate risk by balancing stable core investments with higher-risk satellite investments.
Selecting the Right Investment Platform
Finally, Sarah needed to choose an investment platform to manage her core satellite portfolio. She considered various options, including:
- Raiz: Known for its easy-to-use concept and micro-investing features.
- Spaceship: Offering tech and growth-based investing in a user-friendly platform.
- Stake: Providing a low-cost and intuitive app interface for trading US stocks.
- SelfWealth: A traditional brokerage service with competitive fees.
- Webull: A more advanced platform suitable for intermediate and advanced investors.
Each platform had its unique features and benefits, so Sarah had to evaluate which one best aligned with her investment goals and preferences.
Sarah's Core Satellite Portfolio: A Detailed Example
After thorough research and analysis, Sarah built her core satellite portfolio using a mix of investments that aligned with her interests and knowledge. By carefully selecting her core and satellite investments, she aimed to create a well-balanced and diversified portfolio. Here's a breakdown of Sarah's initial core satellite portfolio:
For her core investments, Sarah chose three low-cost, diversified ETFs that provided broad exposure to different markets:
- Australian Shares ETF (ASX: VAS): This ETF provided exposure to the largest companies listed on the Australian Securities Exchange, giving her a solid foundation in the Australian market.
- US Shares ETF (ASX: IVV): As Sarah was interested in the US market and believed in the long-term growth potential of American companies, she chose this ETF to gain exposure to the S&P 500 index.
- Global Shares ETF (ASX: VGS): To diversify her core portfolio further, Sarah selected this ETF, which offered exposure to a broad range of companies across developed markets worldwide. Yes it doubled up a few holdings with IVV but she felt comfortable with this.
These core investments made up 70% of Sarah's portfolio, providing her with stability, diversification, and a solid foundation for long-term growth.
For her satellite investments, Sarah allocated 30% of her portfolio to a mix of individual stocks and sector-specific ETFs. These investments were chosen based on her interests and knowledge of specific industries and companies.
- Tech Stocks: Sarah had a strong interest in technology, so she invested in individual shares of leading tech companies like Apple, Microsoft, and Google-parent Alphabet.
- Healthcare Sector ETF (ASX: IXJ): Sarah believed in the long-term growth potential of the healthcare sector, so she chose this ETF to gain exposure to a diversified range of global healthcare companies.
- Emerging Markets ETF (ASX: VGE): To capitalise on the potential growth of emerging economies, Sarah invested in this ETF, which provided exposure to companies in countries like China, India, and Brazil.
- Renewable Energy Stocks: Sarah was passionate about sustainability and renewable energy, so she invested in individual shares of leading renewable energy companies like Tesla and NextEra Energy.
By carefully selecting her satellite investments based on her interests and knowledge, Sarah added growth potential to her portfolio while maintaining a level of diversification.
Core vs. Non-Core Asset Allocation
Sarah's core satellite portfolio illustrates the difference between core and non-core (satellite) asset allocation:
- Core assets: These investments provide broad market exposure, stability, and diversification. In Sarah's case, the Australian, US, and Global Shares ETFs made up her core assets, representing 70% of her portfolio.
- Non-core assets (satellites): These investments are more focused and have higher growth potential. Sarah's satellite investments, including tech stocks, the healthcare sector ETF, the emerging markets ETF, and renewable energy stocks, represented 30% of her portfolio.
Through her core satellite portfolio, Sarah achieved a balance between stability and growth potential, leveraging her interests and knowledge to create a diversified and personalised investment strategy.
Core satellite investing is a versatile and adaptable investment strategy that balances stability with growth potential. By combining a stable core of diversified, low-cost investments with a selection of higher-risk satellite investments, investors like Sarah can create a winning portfolio that aligns with their risk tolerance and long-term financial goals.
By leveraging tools that did the work of trading, tracking, and managing her investments, Sarah was well on her way to building a successful core-satellite portfolio that would help her achieve her financial dreams.
While this is a made-up case study, I am someone who has found this approach as a great way to build passive wealth while maintaining some active output that has the potential to make it even more rewarding.
I talk about the core satellite investing approach more in a podcast episode of Shares for Beginners