Something interesting happened about a week ago. As you might have read –on my twitter feed or on the blog– I signed the deed of the mortgage and apartment. As a result I'm official the owner the apartment and the land the building is build on; Partially when it comes to the land. What I hadn't mentioned was that I got a 16,575 EUR tax deduction!
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.
Investopedia really explains it best:
Core-satellite investing is a method of portfolio construction designed to minimize costs, tax liability and volatility while providing an opportunity to outperform the broad stock market as a whole. The core of the portfolio consists of passive investments that track major market indices. Additional positions, known as satellites, are added to the portfolio in the form of actively managed investments. (Smith, 2019)
Why I choose a core-satellite strategy
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.
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
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 make 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 ~68% passive and ~32% active.
I’m not there yet because I focussed too much on getting my personal favorites before investing in ETFs. I’m slowly adjusting 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
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.
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.