Research on asset allocation shows that spreading your investments across multiple ‘baskets’ can not only grow your wealth over time but also reduce overall volatility. By diversifying into assets that are uncorrelated or even negatively correlated, your portfolio can better withstand market fluctuations. But what if you want to add some extra growth potential to just one part of your portfolio? That's where the Core-Satellite approach comes in, strategically blending stability with targeted opportunities for higher returns.
How it works:
The Core-Satellite approach to portfolio construction allows investors to balance risk and volatility by controlling the exposure of their assets to higher levels of risk. In this strategy, the 'Core' makes up the largest portion of the portfolio. Typically, this Core allocation is set at a lower risk tolerance, aiming for stable, dependable growth. This conservative foundation enables the 'Satellite' positions to take on higher-risk, even speculative, investments, creating a balanced blend of risk and return within the investor's comfort zone. It’s a classic way to seek out those 'home runs' while keeping most assets focused on 'singles' to maintain steady growth. The graphic below illustrates this structure:
Please remember, this is not a recommendation but an example of an investment approach that has had mixed results for investors.