core satellite investing strategy

Core-Satellite: A Perfect Sleep at Night Investing Strategy

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A core-satellite investing strategy reduces your investing risk but leaves room for gains

Many investors spend most of their time worried about picking individual stocks that will beat the market. While you might be able to pick a few winners every once in a while you’d have to be some kind of Wall Street prodigy to do it regularly.

In fact, research shows that even mutual fund managers have had a tough time consistently picking individual stocks to beat their peers.

Just 39% of professional fund managers were able to beat the average fund performance in 2012 and most under-performed the market when accounting for fees.

sleep at night investing strategy core satellite
Beat the Market with the Core-Satellite Investing Strategy

If you can’t beat the market, you might be tempted to just ‘join it’ by investing only in broad index exchange traded funds (ETFs) like the SPDR S&P 500 ETF (SPY) that invests in the overall market.

But just investing in the market means your returns are going to be limited, especially after paying fees and after Uncle Sam takes his share. Fortunately there’s an investing strategy that offers the best of both worlds, easy index investing with the chance for higher returns on a few standout stocks.

I call it my sleep-at-night investing strategy but most know it as core-satellite investing.

The Core Satellite Investing Strategy

A core-satellite investing strategy means investing the majority of your money (the 60% to 80% core) in broad funds and the rest of your money around individual stocks. The core portion of your portfolio gives you exposure to the entire market, reduces your overall risk and limits your loss to fees. The satellite portion of your portfolio gives you the opportunity to pick a few winning stocks and put your market analysis to work.

Most broad index funds invest passively across hundreds or thousands of companies and infrequently change investments in the fund. This means annual management fees as low as 0.20% of your investment. Beyond the core portion of your portfolio, you only need to choose about 10 to 20 individual stocks for the satellite portion of the investing strategy.

By only investing a small portion of your portfolio in a few individual countries or companies, you cut down on the amount of research and analysis you need to do as well as the amount of time it takes to monitor your stocks for changes.

The core portion of your portfolio is a buy-and-hold investment that requires no monitoring. The satellite portion of investing strategy may involve some research to pick your favorite stocks but then minimal maintenance if they are long-term picks.

Even with a core satellite investing strategy, it’s best to take a long-term view. Trying to time the market and trade in-and-out of your stocks will mean that fees eat into your returns. Even just picking a handful of stocks for the satellite portion of your portfolio can get a little expensive if you’re investing multiple times a year.

One newer online investing site, Motif Investing, helps to cut costs by letting you group individual stocks into a fund and buy them all with one commission. You essentially create your own exchange traded fund with your individual picks. You can create a fund with up to 30 stocks and then pay one fee of $9.95 to buy them all.

core satellite investing strategy example

How to Set up a Core-Satellite Investing Strategy

Setting up the core portion of your core-satellite investing strategy is pretty easy. You want to choose three to five broad-based ETFs that will give you exposure to the larger market. All funds will give a percentage breakdown of the type of stocks held as well as the fund’s focus on its website.

Don’t forget to choose funds that will give you exposure to large and small companies as well as foreign companies. You don’t have to buy an equal amount of each fund. You might want to buy more of a fund that gives you complete stock market coverage and then buy smaller amounts of a few other funds.

Some exchange traded funds to consider for your core satellite investing strategy:

Vanguard Total World Stock ETF (VT) might be the broadest fund available, providing access to 7,391 stocks across the globe. The fund charges a management fee of just 0.17% annually and spreads investments across countries and different size companies.

SPDR S&P 500 (SPY) is what most people think about when they think of the stock market. The fund invests in 500 of the largest and most stable companies based in the United States and charges a super-low 0.11% annually.

Vanguard REIT ETF (VNQ) might be part of your real estate investing strategy but I had to mention the fund. It’s a great resource for investors, providing access to 144 companies that invest and manage real estate properties. These companies pass almost all their profits down to investors each year, making the dividend extremely attractive, and the fund charges just 0.12% annually.

iShares MSCI Emerging Markets (EEM) invests in 846 companies and more than 15 of the fastest growing counties in the emerging world. The management fee of 0.68% is a little higher than other broad market funds but it’s important to have exposure to these countries and companies that should beat slower growth economies over the coming decades.

The core-satellite investing strategy and building a portfolio around your need for return and risk tolerance are key components of my Step-by-Step Investing series.

Each book in the series shows you how to put together a detailed plan around an investing strategy or theme to meet YOUR needs.

You don’t need to be a stock market genius to pick stocks that can do well over the long-term. For the satellite portion of my portfolio, I like to look for stocks with the power of long-term trends behind them. These companies will benefit from overwhelming market forces like demographics, tech trends and population needs.

One example is my individual investments in fertilizer and other agriculture-related companies. Record harvests and the El Nino weather phenomenon have driven crop prices to multi-year lows but there’s little doubt of the massive long-term demand for grains and other crops. Stock prices of fertilizer companies and seed suppliers are lower now but will benefit greatly over the next couple of decades on rising population demand for food.

Besides using Motif Investing to buy your individual stocks, you could use it for your entire core-satellite portfolio. Since ETFs are traded like stocks, you can include them in your motif funds and buy everything with just one commission. Construct a core satellite portfolio with five funds and 15 individual stocks and pay just $9.95 to buy them all and then $10 each time you want to invest more money into your portfolio.

The core satellite investing strategy is one of the most efficient tools for setting up your investments. The strategy gives you the confidence and ease of buy-and-hold index investing. You’ll benefit from the general upward direction of the stock market without having to worry about constantly picking winning stocks. You’ll also get the benefit of long-term trends in individual stocks and a chance to beat your investment goals without spending every waking hour reading stock analysis.


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