Core-Satellite Strategy: How I Structure My Portfolio
On my portfolio page I mention that I follow a core-satellite strategy. I want to clarify what this exactly means and how it’s different compared to what you will find when researching FIRE.
Instead of relying on dense financial jargon, the core-satellite strategy is best understood as splitting your investment portfolio into two distinct layers: a safe foundation (the ‘core’) and a tactical growth engine (the ‘satellite’).
- The Core (in my case ~ 70% – 80% of my portfolio): This is the foundation. It consists of low-cost, broadly diversified index funds or ETFs (such as SPYI or IWDA). The core tracks the broader global market to guarantee steady, long-term returns with minimal management.
- The Satellites (20% to 30% of my portfolio): These are smaller, specialized allocations. This layer is made up of individual stocks, regional REITs, or high-conviction plays. In my case this would be, for example, D-local (ticker: DLO), Caris Life Sciences (CAI). You actively manage this section to capture higher returns and tilt your portfolio toward specific market opportunities.
By building my portfolio this way, I get the ultimate peace of mind. My broad-market core secures my long-term wealth, while my satellites allow me to make tactical bets on individual companies without risking my entire financial future.
Why I choose a core-satellite strategy
I originally came across this concept while reading the Dutch book “index investing” by Jacques Wintermans. It was exactly what I wanted.
While I enjoy the simplicity and safety passive investing provides me, I also enjoy spending time looking into companies and sectors that really interest me. Putting in a bit of extra time and resources there would keep me busy and allows me to learn more about the markets while still being relatively safe in the long-term.
Costs
The core portion of the portfolio reduces costs, because passive investments are almost always cheaper than their active counterparts. Since passive investments track indices, the portfolio changes only when the index changes. Due to the fact that indexes change infrequently, transaction costs are minimized.
Volatility
While volatility is something many investors try to avoid, I’m not worried about how this can impact my emotional state. By dedicating a large portion of a portfolio to passive investments, the volatility of the total portfolio shouldn’t get high. I limit this volatility further by investing in REITs or Real Estate Investment trusts. These trusts are stable thanks to their intrinsic value, real estate. Not all real estate is the same and you will always have risks:
- Stock price
- Interest rate
- Rental risk
- Dividend risk
Returns
Active managers attempt to outperform their benchmarks (usually an index of some sort). By allocating a minority of the portfolio to active management, be it by doing it myself or through a fund, I have the opportunity to outperform, thus adding to the return generated by the overall portfolio and creating extra return on top of the indices, aka generating alpha.
My core-satellite asset allocation
I opted to aim for a 80/20 split. 80% of the portfolio is passive investing through ETFs; 20% is reserved for individual stocks. At the time of writing this post my ratio is ~72% passive and ~28% active.
At the moment, this means I’m not actively trying to reach 80 as I feel I have a good balance at the moment. If this balance would move more towards individual stocks, I will slowly adjust this by adding to my trackers or selling some individual stocks.
My concrete investments can be found on my portfolio page but I’ve basically focussed on the following sectors:
- Real Estate (REITs)
- Health care
- Technology
And then more global trackers in line with most seeking FIRE. I also have a small amount in a tax-refundable pension fund. Finally, there is a bit of money in a savings account, though thanks to the purchase of an apartment this has significantly reduced. I will increase thus emergency fund in the coming months.
The bottom line
This core-satellite approach gives me the opportunity to access the best of all worlds. Better-than-average performance, limited volatility and cost control all come together in a manageable package that is specifically catered to my needs.
Sources:
- Smith, L. (2019, November 18). A Guide to Core-satellite Investing. Retrieved December 7, 2019, from https://www.investopedia.com/articles/financial-theory/08/core-satellite-investing.asp.