The Verus Team

Core and Satellite Investing – The Science and the Art.

Written by: Derek Majkowski. Any opinions are those of Derek Majkowski and not necessarily those of RJFS or Raymond James.

When I think of the word “Core”, several things come to mind.  One is the root or definition which defines it as the strong, center, or the foundation of something.  Another relates to your muscular make-up around the torso and abdomen of your body, or the last and obvious one is the large center of an apple.
 
The key is that it represents strength, mass, and foundation. 

With investing, I like to call this the “Don’t Outsmart It” part of a portfolio, or the Science.  

This is a properly allocated portfolio that consists of equities, bonds, and cash that is diversely spread across investment products that captures large groupings of investments.  Some may consider using index investments to create this foundational part of an investment portfolio, others may use different vehicles to achieve the desired core holdings.  

The combination of these different investments is determined based on an individual’s time horizon and risk tolerance.  Simply put, it is owning the market by utilizing tools that provide efficient, broad, cost effective exposure.

A Satellite however, is something that is smaller and it orbits around something stronger and larger.  It is not insignificant, but it also does not carry the same weight of something larger – like a core.

In the portfolios we build, we will discuss the foundation of a core allocation combined with the possibility of integrating satellite positions or strategies.  This may come by utilizing individual securities, sector specific weightings, different investment tactics, or asset class management.  

The idea is to use these tools in an attempt to capture additional interest or return, hedge a position or portfolio, or provide exposure to an area that may offer something different than the core as far as allocation and timing.

These typically are smaller portions of an overall investment approach (if suitable), and correlate to what we consider to be the Art of crafting a portfolio.

Whether it be crafting a core or sprinkling in satellite components, we like to think every investment approach is a combination of Science and Art.

Obviously no guarantees on outcome, but an approach that makes sense to us.

 

Investing involves risk, investors may incur a profit or a loss regardless of the strategies employed. Diversification and asset allocation do not ensure a profit or guarantee against loss.