Maximising Returns and Managing Risk: A Guide to Building Your Core-Satellite Investment Strategy

Learn about the Core-Satellite strategy. What is it? Why does it get recommended? How often should you check on your investments? Find the answers to your questions and an example of a core-satellite strategy in this helpful guide.

Introduction

In the dynamic world of investing, the key to success lies in developing a strategy that balances growth potential with risk management. One strategy that is gaining popularity is the Core-Satellite Investment Strategy. This approach allows investors to diversify their portfolios intelligently, combining stability with opportunities for growth. In this blog, we'll delve into the step-by-step process of building a robust Core-Satellite Investment Strategy to help you achieve your financial goals.

What is the Core-Satellite Strategy?

The Core-Satellite Investment Strategy involves dividing your portfolio into two main components: the core and satellite holdings.

The core is comprised of low-cost, diversified investments such as index funds or blue-chip stocks. This provides stability and acts as the foundation of your portfolio. This will usually be 80-90% of your portfolio. This forms the backbone of your investments and can be left alone for the long-term.

The satellite focuses on a smaller range of high-risk, high-reward investments. This exposes you to the potential for higher returns. These investments are intended to complement the core and enhance overall portfolio performance.

Together these two pieces make up your portfolio, allowing you exposure to the possibility of higher returns, while minimising the risk to the larger portion of your investments.

An Example of a Core-Satellite Portfolio

An example of a basic core-satellite portfolio would be a 90/10 split. You might invest 90% of your portfolio in in Kōura’s Core Funds and 10% in Kōura’s Specialty Funds. This is a very basic example, designed to demonstrate the basic principles behind the core-satellite strategy.

90% - Kōura’s Core Funds

10% - Kōura’s Specialty Funds

The following is an example of a breakdown of how that allocation might look like. Your core could be made of the following funds:

20% - Kōura’s NZ Equities Fund

30% - Kōura’s US Equities Fund

30% - Kōura’s Rest of the World Fund

10% - Kōura’s NZ Fixed Interest Fund

Your satellite could be made of the following funds:

5% - Kōura’s Carbon Neutral Cryptocurrency Fund

2.5% - Kōura’s Property Fund

2.5% - Kōura’s Clean Energy Fund

Your core and satellite can be made up of a variety of different funds with varying allocations. The key is to ensure a majority of your portfolio (the core) is invested in less volatile assets.

Things to Consider when Building your Strategy

There are a few things you’ll need to consider before building out your core-satellite portfolio.

Risk Tolerance. How comfortable are you with seeing your balance fluctuate with the market?

Diversification. How many holdings do you have? Are they in a range of countries, industries, sectors and/or stocks?

Cost of Trading. Is it low cost? Expensive trading, holding and funds management costs will eat into your returns.

How often should you check your investments?

You should check on your investments regularly with this strategy. If left too long, a highly successful (or unsuccessful) satellite investment can unbalance your portfolio. This means that if left unchecked it can begin to take up too large (or too small) a share of your portfolio, thereby exposing you to more risk than planned in the long term. You should regularly check your investments and rebalance your portfolio back to its original allocation (e.g. selling or buying assets to maintain the desired allocation).

For example, maybe you set up your strategy to have 90% in Kōura’s US Equities Fund and 10% in Kōura’s Carbon Neutral Cryptocurrency Fund. If the Kōura’s Carbon Neutral Cryptocurrency Fund grew at faster rate than the S&P 500 Index Fund, your allocation might eventually shift to a 85/15% split. In order to lock in your gains, you would need to rebalance your allocation back to your chosen 90/10% allocation.

Conclusion

Building a Core-Satellite Investment Strategy requires careful consideration of your financial goals, risk tolerance, and market conditions. By blending stability with growth opportunities, this strategy provides a well-rounded approach to long-term wealth creation. Stay disciplined, stay informed, and adapt your strategy as needed to navigate the ever-changing landscape of the financial markets.

Disclaimer  

Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion, and seek independent guidance.