The core/satellite model approaches investment strategy using the two major viewpoints of stable investment meant to avoid market volatility, and higher risk investment, which is necessary for higher returns. Because of the instability of financial markets, the construction of the core portion of one’s portfolio is necessary to provide a sound base for one’s investments. As the word “core” indicates, these relatively stable passive investments, like ETFs and passive mutual funds, are the bulk of the portfolio in this strategy. The core will often be balanced with other non-equity investments that fluctuate independently from the stock market
Core investment trading is often limited to manage tax losses, and also because this portion of the portfolio is constructed as a long-term investment for the future. With a stable core in place, the satellite portion of the portfolio is intended for higher performance with a smaller percentage of assets. The smaller size of satellite investments limits the overall risk exposure of the client. At the same time, it gives the portfolio manager the opportunity to actively seek returns that outperform their benchmarks.
Unlike core investments, satellite holdings may be traded very rapidly. Tax losses are inevitable in satellite trading, but there is also the enhanced opportunity for short-term gains. Because of the balanced approach of core/satellite portfolio management, such investments should be utilized in any overall financial investment strategy.