Core Satellite asset allocation is an investment strategy that consists of two parts the “core” and the “satellite.” The first part is known as the core portfolio. It invests in traditional fixed income securities like index funds, mutual funds, and other passive strategy investments. The second is known as the satellite portfolio. It invests a percentage of the available funds in individual stocks and other actively traded investment.
The core-satellite strategy has been around for a while. It has been useful to many investors who take full advantage of the core satellite approach. It allows investors to reduce their risk in a passive well diversified portfolio, while allowing these investors to seek out higher expected returns. The core satellite investment strategy is beneficial because the investor takes on little extra risk but can normally expect higher returns in the market.
Jacob has some extra cash that is sitting in a savings account at a bank. He has recently decided that he wants to invest this amount in the market. Jacob has also decided that he will use the core satellite investment approach. Jacob has thus decided that he will invest 80% of the cash in a passive mutual fund, and the other 20% in individual stocks that he believes will perform above the market. By doing this Jacob is safe from any huge downfalls in the market because he has a well diversified portfolio in the mutual funds, but he also expects a higher return from the individual stocks.