Asset allocation has been proven to be one of the key determinants of portfolio performance. One of the potential methods of asset allocation is known as core-satellite investing. In core-satellite investing, your investment portfolio is divided into two major categories: the “core” and the “satellite.
The core is made up of low-cost passive investments, such as index funds, mutual funds, or exchange-traded funds (ETFs) that track broader market averages. Examples include the S&P 500, a broad market index composed of 500 stocks traded on U.S. stock exchanges, or an ETF that tracks global equity markets. The satellite(s) are more actively managed investments that are chosen for specific reasons, such as outperforming the broad averages or managing specific risks.
Is core-satellite investing right for you?
It certainly has major advantages and is worth discussing with a San Antonio financial advisor at PAX Financial Group. All portfolio strategies are designed to meet your specific goals. Your optimal asset allocation is determined based on your goals, situation, risk tolerance, age, and other factors.
Advantages of Core-Satellite Investing
Advantages of the Core
Core-satellite investing has many advantages for people seeking wealth management in San Antonio. This type of broad-based passive investment provides diversification and flexibility that can protect you against risk. Cores range from 50 percent to 80 percent of a portfolio.
The choices for what constitute the core can range widely: it can be, for example, fully invested in the S&P 500 or a similar index to diversify you in stocks or the total to 80 percent of your portfolio but be divided equally between a passive stock index and a passive bond index, to provide a diversity of asset classes.
Having a core invested in a broad-based index or ETF for the long term is simply efficient. The core is usually chosen because it has demonstrated reliability and consistency over time. It isn’t necessary to trade the core a great deal over either the short or long term.
These efficiencies may also lead to cost-effectiveness. The more types of investments you have and the more frequently they are bought and sold, the higher your transaction costs will be. In addition, broad-based indexes and ETFs have lower transaction fees than other types of investments. The core can also lead to tax efficiencies, such as lower capital gains taxes.
Advantages of the Satellite(s)
The satellite(s) also provide wide flexibility and strong diversification.
Satellites can be chosen to provide higher appreciation potential than the core passive investment(s). Actively managed satellites can be composed of assets that your financial advisor believes have the potential to outperform the market. They can be composed of high-risk/high-reward sectors, such as emerging markets.
They can cluster in securities in which there is an expectation of growth, such as artificial intelligence. They may be grouped in geographic areas that are expected to outperform the area where your core investments are located, providing more appreciation potential and low correlation with the movement of the core. Bear in mind the potential for gain can also mean potential for loss.
They can be chosen to diversify your portfolio widely. Many portfolios are divided among asset classes such as stocks, bonds, and cash. Stocks provide a higher appreciation potential than bonds and cash, but are also higher risk, as stock prices constantly fluctuate. Bonds and cash are lower risk, but also lower reward, as their interest rates can yield lower returns than stock price appreciation, on average.
However, these three asset classes provide diversification because their returns and performance do not correlate with each other: the stock market can experience a downturn that does not affect the performance of bonds or cash. Similarly, bond performance can be affected by factors that do not necessarily affect stock markets or cash instruments.
Satellite investments can be chosen to mitigate portfolio risk. You and your financial advisor may, for example, want to choose bond funds, which will not correlate with stock market movements if your core funds are in stocks, in order to protect from potential stock market downturns.
Satellite investments can also be chosen to mitigate specific risks, such as inflation. (Generally, inflation runs at 2 percent per year, but recently it has been higher. In all cases, if your portfolio returns do not outpace the annual inflation rate, you are effectively losing money on it.)
Satellite investments can be utilized to place you in sectors that support your specific values and goals. Many of our clients, for example, want to follow Biblically Responsible Investing (BRI), so that their spiritual beliefs are aligned with their Christian values and beliefs. The satellite investments can actively support businesses or causes that reflect spiritual beliefs so that you follow the Christian responsibility of good stewardship of your wealth.
The satellite portion is very customizable. It can be customized to:
- Reflect your age and retirement status, for example, by increasing the proportion of your assets in low-risk, stable investments.
- Reflect changes in the economic or world environment.
- Reflect changes in your goals or life situation.
- Can be customized to focus on short-term events as well, while the core stays focused on the long-term.
All investment portfolios need yearly review and rebalancing to maintain the progress toward your goals and to take into account any changes in your life and your objectives.
Contact Pax Financial Group To Discuss Your Investments
At PAX Financial Group, we are fiduciary financial advisors who always place your financial best interests before our own. We recommend investing plans and strategies based on your goals and life objectives, as part of a comprehensive financial plan based on your goals and short- and long-term life objectives. Contact us to meet either by phone or in our convenient San Antonio, Texas office.
