How to build (and manage) a core-and-satellite portfolio

• The core-satellite strategy combines long-term stability with targeted high-growth opportunities. Your core investments – for example, broad-market ETFs and bonds – provide a solid foundation, while your satellite holdings allow you to take strategic risks in emerging sectors or trends.

• Using ETFs in the satellite portion helps spread risk while still capitalizing on high-growth areas. Individual stocks can offer upside potential, but they require careful research and management.

• Over time, your portfolio’s allocations will shift. Regular reviews and adjustments can ensure your investments stay aligned with your goals, keeping your risk in check while maximizing growth.

Investing (like life) is about balance. The trick is to achieve growth without taking on too much risk. And a dual, core-and-satellite strategy can help with that. It means a core group of assets serves as your portfolio’s foundation, offering stability and long-term appreciation, and satellite holdings enhance your returns. The beauty of this approach is you get the best of both worlds – a cost-effective, diversified core investment with the flexibility to pursue riskier opportunities.

Here’s how to get the best out of this approach.

First, let’s get right to the core.

A strong core is the backbone of a portfolio. Ideally, it should consist of low-cost, diversified investments that provide consistent returns over time. Broad-market ETFs that track indexes like the S&P 500 or global stock markets make excellent core holdings because they spread risk across hundreds (or even thousands) of companies. Bonds or fixed-income funds can also play a role here, providing a bit of stability during market downturns.

The key things here are simplicity and cost efficiency. Passive investments, like index funds and ETFs, typically have lower fees than actively managed investments, making them a smart choice for a long-term foundation. And that’s good: these core assets will do most of the heavy lifting for your portfolio, allowing it to grow steadily with minimal maintenance.

How a core-and-satellite portfolio works. Source: DBS bank.

Next, let’s zoom out and talk satellites.

With that core keeping your portfolio stable, you can consider taking some targeted risks with your satellite investments. These allow you the flexibility to seek out assets that have the potential for higher returns – in specific industries, emerging markets, or even cutting-edge technologies. It’s your chance to invest in sectors, themes, or individual stocks that might deliver higher returns than the market overall.

You can build out your satellite holdings in several different ways. Thematic ETFs are one idea: they focus on specific trends, including high-growth things like artificial intelligence, clean energy, or space exploration. Leveraged ETFs are another, more aggressive idea: they offer amplified exposure to market movements, but they require close monitoring. Actively managed funds or carefully chosen high-growth stocks can also fit within a satellite strategy, giving you access to professional expertise or direct exposure to companies with strong upside potential.

Word to the wise: you’ll likely want to keep the satellite portion of your portfolio on the small side, usually around 20% to 30% of the total, depending on your risk tolerance. That way, even if a particular investment flops, your core holdings will keep your long-term financial plans on track.

Now, how to choose your satellites.

The big debate here is whether to go for focused ETFs or individual stocks. ETFs can give you instant diversification, making them a somewhat safer way to gain exposure to high-growth industries without the risk of betting on a single company. They also require less research and monitoring, making them ideal if you want to capitalize on trends without diving into the details of individual stocks.

On the other hand, if you like stock picking and have the time to do a little research, individual stocks can offer higher upside potential. You’ll just want to keep in mind that a single-stock approach can come with added risk, without other stocks to serve as counterbalance. A well-structured satellite strategy often blends ETFs and individual stock holdings, allowing for diversification while still capturing high-growth opportunities.

Each type of satellite investment serves a different purpose, and knowing when to use them is key to optimizing your portfolio.

Thematic ETFs work well when you believe in a long-term trend but don’t want to pick individual winners. If you’re bullish on clean energy, for example, an ETF that tracks the trend can allow you to invest broadly rather than trying to figure out which company will lead.

Leveraged ETFs can be powerful tools when you want to amplify short-term gains, but they should be used carefully because they come with higher risk. They’re best suited to investors who actively manage their portfolios and understand the volatility involved.

Actively managed funds make sense when you want professional oversight in areas where stock-picking expertise could give you an edge. Some sectors, like biotechnology or emerging markets, can benefit from skilled fund managers who both do their homework and navigate complex market dynamics.

High-growth stocks are a great fit when you have a strong conviction about a specific company’s potential and are willing to take on more risk for the possibility of outsized returns. These should be used sparingly, as too much exposure to single stocks can make your portfolio vulnerable to unforeseen market swings.

And finally, how to manage it all.

Investing isn’t just about choosing the right assets – it’s about maintaining the right balance. Over time, different investments grow at different rates, which can throw a carefully designed portfolio off course. Without regular adjustments, a core-satellite strategy can drift, increasing your exposure to riskier assets or reducing your growth potential.A simple way to manage this is by reviewing the portfolio periodically – typically, every six to 12 months. If any segment of the portfolio shifts significantly from the original allocation – let’s say by more than 5 percentage points – it may be time to rebalance. This could mean trimming positions that have grown too large and redistributing the money gained back into the core. Alternatively, new investment contributions can be directed into underweighted areas instead of selling existing assets, gradually bringing the portfolio back in line.

Because satellite investments often carry higher risk, putting in some additional safeguards is important. Don’t let a single stock dominate your portfolio, and remember that stop-loss orders can help limit your downside exposure. While those thematic ETFs and high-growth sectors can present exciting opportunities, they will also require close monitoring. Keep in mind that market trends can shift quickly, and what was a strong growth theme one year might lose momentum the next. While adjustments are necessary, overtrading should be avoided, because frequent buying and selling can result in higher fees and potential tax implications.

Whether you’re a cautious investor looking to add some growth or a risk-taker wanting to balance out volatility, this approach offers a structured, flexible, and effective way to build wealth. Investing doesn’t have to be an all-or-nothing game – with this strategy, you can grow your portfolio confidently while managing risk wisely.

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