There are many strategies and models for investing in securities. The core satellite strategy can be of particular interest to ETF investors. The basis is formed by widely diversified nuclear installations. In addition, with the core-satellite approach, there are smaller shares of riskier funds, which are supposed to help generate additional income and reflect individual preferences. Before setting up your own portfolio accordingly, it is worth taking a look at all the advantages and disadvantages of the core-satellite strategy.
What is the core satellite strategy?
The core-satellite strategy should combine passive and active action in a meaningful way and ensure the greatest possible security and return. The term is intended to underline that there is a core and various individual systems (satellite) in the approach. Accordingly, the depot is divided into 2 groups:
- Nuclear facilities (core)
- Single systems (satellite)
The nuclear facilities should give the depot the necessary stability. The focus is therefore on broadly diversified investments, which are often weighted up to 80 percent in the portfolio and are therefore very high. In line with the buy-and-hold approach, core investments do not rely on short-term and risky price bets. Through such passive management, investors hope for a sustainable return, especially for later times. Nuclear plants can, for example, serve as a retirement provision – provided the plants generate substantial profits over a longer period of time. The core investments form the foundation of the portfolio according to the core-satellite approach with the aim of stable and long-term performance.
The individual investments selected around this core should offer additional income potential and serve as a return boost in the portfolio. But the prospect of higher returns is usually associated with a significantly higher risk – occasionally total losses also occur. The proportion of rather speculative individual investments in the core satellite portfolio is therefore usually low and in many cases is around 20 percent. However, the weighting between core and individual investments can vary depending on the investor’s willingness to take risks.
GOOD TO KNOW: The idea of the core satellite portfolio of combining passive and active trading in a common strategy has existed since the 1970s. American economists suggested covering the broad market with an index fund. Market timing and analysis, on the other hand, should be applied to individual stocks in niche markets. However, since ETFs or exchange-traded index funds did not appear on the market until a few years later, the idea initially did not catch on.
Core-Satellite Strategy in Practice
The core-satellite approach is a popular investment strategy today, mainly thanks to the large number of different ETFs.
For the core of a core satellite portfolio, for example, ETFs and other investment funds that invest in stocks from different countries with developed markets and companies are possible. Funds that invest specifically in stocks with high dividends or bonds from states and companies with good creditworthiness are also popular options with investors for the core portion in the portfolio – as are comfort funds . This is an investment that is so broadly diversified that opportunities and risks are balanced.
GOOD TO KNOW: One speaks of an asset allocation, also known as an asset allocation, when the assets are distributed across the various asset classes (e.g. ETFs, stocks, funds and commodities).
When choosing the right satellite, not only knowledge of the stock markets but also personal risk tolerance as well as individual attitudes and topic orientation play decisive roles. Basically, high-growth regions, individual industries, investment themes and asset classes such as commodities can be offered. However, in-depth analyzes are useful before each individual investment, because many of the markets that are eligible for the satellite share are subject to strong price fluctuations, which can lead to enormous losses.
Incidentally, overlaps with values in the core portion cannot be ruled out. On the contrary: In the case of individual investments, it can sometimes be a deliberate doubling or overweighting of individual sectors or countries where the prospect of returns is promising. However, this automatically increases the cluster risk, which always arises when investors proceed very unilaterally and do not structure their investments in the sense of asset allocation.
GOOD TO KNOW: The core-satellite strategy can be implemented in practice with both one-off investments and securities savings plans . You can divide your available rate over several savings plans and thus take different asset classes, regions or industries into account. With the method you can also avoid the question of the correct entry point (market timing).
ADVANTAGES AND DISADVANTAGES OF THE CORE-SATELLITE STRATEGY
A broad diversification in the style of the core-satellite strategy can help to reduce the risk in the portfolio. But securities such as stocks or investment funds are always subject to a high level of risk. There are no guarantees for future returns; exchange rate losses can occur just as suddenly. In addition, the financial crisis has made it clear to investors around the world that at extraordinary times all asset classes can see falling prices – no matter how supposedly safe the investment was. Before investing according to the core-satellite principle, investors should therefore not only find out about the advantages but also about the possible risks of the strategy. The advantages and disadvantages described are basically supposed scenarios. No one can predict in advance whether, for example, individual investments will boost returns or contribute to losses. Whether the advantages or disadvantages of a core satellite strategy outweigh many factors such as the future economic situation and personal capital market experience. One thing is certain: Securities such as shares are generally subject to a considerable market risk. Before investing according to the core-satellite principle, investors should therefore carefully examine the risks of the respective investment options.
Conclusion on the core satellite strategy for investors
The implementation of a portfolio according to the core-satellite approach with ETFs is a method that should both take into account the security concept of an investment and increase the return prospects. Whether this succeeds in practice depends largely on the selection of the individual systems. With an ever-increasing selection of niche market options such as industry ETFs , investors can put their core portion together as they wish, but sometimes require specific knowledge of megatrends and other market areas.