The core-satellite approach is an investment strategy that involves investing in a mix of “core” investments—such as index funds—that offer broad diversification and “satellite” investments—such as individual stocks—that offer the potential for higher returns. Many investors choose to use this approach because it strikes a balance between risk and reward. In this blog post, we’ll take a closer look at the core-satellite approach and how it can potentially benefit investors.
The Core-Satellite Approach Defined
The core-satellite approach is an investment strategy that involves investing in a mix of “core” investments—such as index funds—that offer broad diversification and “satellite” investments—such as individual stocks—that offer the potential for higher returns. The core portfolio usually consists of low-cost, passive investments, while the satellite portion typically consists of more active, higher-cost investments.
Why Use the Core-Satellite Approach?
The main reason to use the core-satellite approach is to strive to strike a balance between risk and reward. The core portfolio offers the benefit of diversification, which can help protect against losses in any one particular investment. The satellite portion offers the potential for higher returns, but also comes with higher risks. By using a mix of both types of investments, investors can potentially maximize returns while minimizing risks.
How to Implement the Core-Satellite Approach
There are a few different ways to implement the core-satellite approach. One way is to invest in a target date fund, which is a type of mutual fund that rebalances its allocation of assets over time based on the investor’s expected retirement date. Another way is to invest in a balanced fund, which is a type of mutual fund that maintains a consistent ratio of stocks to bonds. Investors can also build their own portfolios using individual stocks, bonds, and/or mutual funds.
The core-satellite approach is a popular investment strategy that can be used to strive for a balance between risk and reward. This approach involves investing in both “core” investments—such as index funds—and “satellite” investments—such as individual stocks. The main benefit of this strategy is that it can help investors maximize returns while attempting to minimize Risks. There are a few different ways to implement the core-satellite approach, including investing in target date or balanced mutual funds, or building your own portfolio using individual stocks, bonds, and/or mutual funds.
