Core and Satellite Portfolio Management
The strategy incorporates fixed-income securities with other speculative securities. The goal of the entire portfolio is to optimize it and this means ensuring stability, growth, predictability and so on from the same investment portfolio.
Having a diversified or balanced portfolio is in simple terms not putting all your eggs in one basket so that if one basket has a hole in it, you don’t lose everything you own.
It is about spreading your risk and increasing the potential for returns received. When it comes to diversifying your portfolio, there are different strategies and approaches to take.
They typically involve you grouping your investment options into a number of asset classes from equity, cash or treasury investments, real estate, bonds, and so on. Of the many strategies, one of the commonest one is the “Core-Satellite” portfolio management strategy.
The strategy incorporates fixed-income securities with other speculative securities. The goal of the entire portfolio is to optimize it and this means ensuring stability, growth, predictability and so on from the same investment portfolio.
The idea is to reduce risk by diversifying, giving you the opportunity to also outperform whatever benchmark is in use. In order words, there should be a balance that helps you achieve higher than average returns together with below-average risk.
You divide your investment portfolio into two parts. Here’s what the two elements are about.
The Core Investments
Core investments typically represent the large portion of the portfolio because they are more predictable or at least move at a stable growth phase. As a rule of thumb, the core should consist of boring but stable long-term investments.
These securities are generally passively managed securities such as passive mutual funds and index funds. An example of a core investment is buying shares in a large public company.
The information for the company is readily available to the market such that one investor does not have an advantage over the other. The core should be generally left untouched unless you want to rebalance your portfolio and the kinds of investments therein should be based on your risk appetite and time horizon.
The Satellite Investments
Satellite investments, on the other hand, take up a smaller portion and can have higher risks. These are the investments that will supposedly give you an edge over other investors.
In other words, it can be anything that has the potential to outperform the market. Satellites are the investment funds that could help the investor get higher returns than the general benchmarks.
These investments if done correctly will help you have a balanced and well-diversified portfolio that is spread across a number of asset classes. You can also obtain higher than normal returns for reasonable risk.
Where you are unsure of how to balance the portfolio or what securities should make up each segment, be sure to seek the help of an investment advisor.
Written by Lawretta Egba.