A core-satellite investment plan is a method of managing your investments around two main components. The core consists of a passively managed portfolio that tracks broader markets, such as the Standard & Poor’s 500 or a bond fund. The satellites are actively managed portfolios chosen to enhance the portfolio. The enhancement can consist of variable objectives, such as outperforming the core or managing risk. Generally, the core ranges from 50 percent to 80 percent of your portfolio, and the satellites range from 30 percent to 50 percent.
Read our latest Quick Guide “Core-satellite Investing in San Antonio”
One of the benefits of core-satellite investing is that it can easily be customized. How will your San Antonio financial advisor build a custom plan for you? Let’s itemize the ways.
1. Begin with your goals
All comprehensive financial planning starts with a discussion of your goals between your financial advisor and you. Why? Because there’s no such thing as financial planning and wealth management that’s one size fits all.
The portfolio and needs of someone in their 20s who is concentrating on building their family may be very different than that of a retiree in their 60s or a business owner in their 40s. The first person’s primary goal may be purchasing a home. The retiree’s goal may be a comfortable retirement income and preservation of capital for the rest of their life. The business owner’s goal may be setting up the business for eventual sale.
Your core-satellite portfolios will be customized to your individual goals, as discussed with your San Antonio wealth manager.
2. Review of goals through time
Goals, of course, change through time. You may decide to travel, buy a second home, or contribute to charities reflecting your spiritual values. In addition, life events such as births, marriages, divorces, remarriages, and deaths can change your goals.
The flexibility of core-satellite investing makes it ideal to continue to customize to meet your new goals and objectives as your mind or your life changes.
3. Maximize portfolio performance based on your goals
One of the chief needs of any portfolio designed to meet your goals is performance. Your financial advisor will tailor your core-satellite portfolio to optimize its performance.
The first key to maximizing performance is seeking maximum appreciation within the limits of your goals, your life situation, your age, your risk tolerance, and other factors, such as your tax situation.
Toward that end, your PAX Financial Group Wealth Manager may place the core in broad-based stock indices with a reliable record of steady performance. Stocks generally appreciate more than other asset types, such as bonds and cash instruments. They also, however, have a greater risk profile, as stocks are one of the most volatile asset classes.
The satellites may be invested to outperform the core. There are multiple strategies for doing this, ranging from investing in stocks, sectors, or geographic locales with outperformance potential to investing in alternate asset classes such as hedge funds, commodities, precious metals, private equity, or real estate.
The second leg of maximizing performance is to manage risk. Core-satellite portfolios can manage risk in several ways. First, the core is usually chosen for stable returns over time, whatever the choice of assets in it. Indexes in U.S. stocks, for example, return consistently well over time, although they may be subject to fluctuation in some time periods.
Second, the satellites can be used to manage several types of risk. Investment risk is the chance of loss of value in your portfolio. Your financial advisor can manage this by actively managing the satellites to outperform the core investment or to make sure the performance of the satellite is not correlated with the core so that the assets are diversified enough that some will continue appreciating even in the event of a downturn in other parts of the portfolio.
Inflation risk is the risk that inflation will outstrip the performance of your portfolio. Historically, U.S. inflation has run at about 2 percent per year. In the past several years, it has soared much higher than that. Your wealth manager must manage this risk by asset allocation and investment picks that outperform the pace of inflation. Without that, you are losing purchasing power in your portfolio, which effectively means that you are losing money.
Interest rate risk is the risk is the chance of your portfolio being negatively impacted by the direction of interest rates. The direction of interest rates affects investments in several different ways. The price of bonds, for instance, moves in the opposite direction as interest rates. If interest rates rise, fixed-income instrument prices fall. If interest rates fall, fixed-income prices rise. Your financial advisor can manage risk by buying bonds of varying maturity dates.
4. Monitor and manage performance
Your investment portfolios need to be actively monitored to ensure optimal performance. In addition, portfolios need to be rebalanced every year to make sure that the asset allocation is still right for you. A period of strong stock market performance, for example, means that your portfolio may end up the year overinvested in stocks, just as a weak stock market year means that it might be underinvested. Rebalancing returns your portfolio to the optimal asset allocation.
The use of a core-satellite portfolio strategy makes monitoring and managing your investments robust and streamlined to manage. It also is cost-effective, as the core investment is generally very low-cost in terms of fees and doesn’t incur trading fees.
PAX Financial Group: Financial Advisors in San Antonio
At PAX Financial Group, we advise you on investments and retirement as part of a comprehensive financial strategy that also includes cash management, risk management (insurance), and estate planning all in the context of your personal goals and beliefs. We are CERTIFIED FINANCIAL PLANNER™ Professionals who are fiduciaries placing your financial well-being above our own. We work with clients who share our Judeo-Christian values. Contact us to meet either virtually or in our conveniently located San Antonio offices.
