Core Satellite Investing

Core satellite investing is a type of investment strategy that utilizes a combination of passive investments and actively managed investments. This type of investing is designed to provide safety and superior performance to a completely passive portfolio. With this strategy, the investor will develop a core portfolio with passively managed assets and a satellite portfolio with actively managed assets. Here are the basics of the core satellite investing strategy.

Two Portfolios

This investment strategy will be managed as if the investor has to separate portfolios. They will utilize a core portfolio and a satellite portfolio. The core portfolio will comprise the majority of the investment dollars. This portfolio will be made up of passively managed investments, such as index funds and ETFs. This type of portfolio will be compared against a particular financial index. For example, it will be compared to the S&P 500 or the Russell 3000, depending on what type of investment strategy the funds use.

The other portfolio is referred to as the satellite portfolio. With this portfolio, the investor will put money into actively managed investments like stocks, regular mutual funds and actively managed ETF's. They could also put money into the hands of a money manager that has the ability to trade the account using their own strategies. Some satellite portfolios will also use more passive investments. For example, if the core portfolio focuses on large-cap stock funds, the satellite portfolio might focus on small-cap company funds. In this way, they can still provide returns even if the core portfolio does not perform very well.

Tax Benefits

One of the major advantages of using a core satellite investing strategy is that you will be able to benefit from tax efficiency. Since the majority of the portfolio is put into passive investment, this means that you will not have to pay very much money in capital gains taxes. Taxes can significantly cut into a portfolios returns and you want to make sure that you limit these costs as much as you can.

Greater Returns

Even though the majority of the assets are in passive holdings, you still have a good portion of the money in more actively managed investments. This means that you can still bring in returns that are in excess of the returns that are generated from the passive management techniques. This will provide you with more returns than the average investor that simply put all of their money into passively managed investments. These projected returns are greater than what you will have to pay in taxes, fees and inflation. 

Using the Strategy

Using both the core and satellite portions of your portfolio can be very beneficial and it can provide you with safety and diversification. Instead of putting all of your money into a particular investing style, you can branch out and benefit in multiple ways. In order to implement these strategies, you should seek out the help of a competent financial advisor that regularly uses them.