Sunday, 14 January 2018

Core & Satellite Investing Strategy

Since I brought on board my Vanguard Lifestrategy index funds in 2015, I have increasingly regarded my strategy as core/satellite. The VLS funds form the core - a diverse mix of global equities and bonds - and account for around 40% of my portfolio. Surrounding this is an assortment of smaller holdings including my legacy investment trusts.


This common strategy involves a dual approach with a 'core' of stable long-term holding(s) combined with an outer layer of more specialist or shorter term holdings which compliment the core element.
The strategy can enable the investor to combine two approaches such as core passive and satellite more active for example.

The core will generally comprise the steady/stable element of the portfolio and which are likely to throw up few surprises. They will generally be low cost buy-and-hold investments but could be a 'basket' of solid investment trusts forming the 'core' combined with a selection of individual shares which may be traded more frequently.

The satellite element can be used to take a little more risk with a smaller proportion of the portfolio with a view to increasing returns. For example it could be a punt on one or more out of favour sectors of the market or individual shares which are well below their long term average. It could equally be areas which the investor considers have exciting prospects such as biotech or technology. Some assets such as commodities have distinct cycles which investors may try to exploit for profit at certain times.

With my portfolio I hold several investment trusts which I like to think can complement my VLS funds. The likes of Scottish Mortgage with its focus on cutting edge technology or smaller companies specialist, Aberforth are two which can help to deliver a slightly better overall return.

For those who like a more hands-on approach to investing, it can be an advantage to have a larger leave-alone core element. Likewise for those who like to 'tinker' around the edges and find it difficult to leave completely alone, the strategy allows the investor some freedom to 'play' the market maybe with a small percentage of the portfolio total value in the knowledge they will probably not do too much overall damage if things don't work out.


Leave a comment below if you use such an approach and share any other ways this strategy could help to keep a portfolio on track.

4 comments:

  1. All sounds reasonable to me John. The question then becomes what % of total wealth should be in the core. 40% sounds a bit light to me. Personally I would have thought 80% would be more like it. Thoughts on that?

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    1. I agree RIT that 40% for a core is probably on the light side and should possibly be 60% and above. I have plans to increase my VLS funds at some point with the cash currently sitting on the sidelines. I have been holding back due to the fall in the value of sterling but that is slowly creeping back and if it continues and there is some correction to the bull run that may be the time to start moving back in. I guess each investor will have their own % mix of core/satellite and as with many aspects, the best mix will be different for each person.

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  2. Thank you for the post diy, I'm still reading and learning about investing and the above made good clear sense to me.

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    1. Good to hear you found it useful SmlSave and good luck with the learning curve.

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