San Francisco Financial Planner, San Francisco Financial Advisor

Constructing portfolios around a core/satellite model is not as new a concept as you might think; large institutional investors have been doing it for years.  At the core, you have the diversification, tax-efficiency and low costs of exchange-traded funds.  And to potentially boost your returns, a handpicked selection of mutual funds, individual securities and/or separately managed accounts.  The “core” index component seeks benchmark performance (a useful strategy to minimize the risk of lagging the market) while actively managed “satellites” seek outperformance.

Like any strategy however, it can be executed brilliantly or poorly.  That is where the experience and expertise of a competent advisor is invaluable.  With the intimate knowledge of your overall financial plan, growth or income objectives, risk tolerance and time frame, they can:

• Help determine which asset classes should be represented in the portfolio;

• How to allocate among those asset classes;

• How each asset class should be further divided among the indexed core and the active satellites;

• And finally, what those core and satellite investments should be.

Compared to the more traditional portfolio of stocks, bonds and mutual funds, a core/satellite strategy can provide a greater degree of risk control.  Remember, “core” positions are often broadly diversified and easily measurable so that you know exactly what you own.

As the core seeks asset class performance, it makes sense to employ a low cost and tax-efficient investment.  Exchange Traded Funds are more cost and tax efficient than actively managed mutual funds…surprisingly, they can even be lower than traditional index funds.

Building your portfolio using a core/satellite strategy could be one of the smartest decisions you can make.  And with the additional benefits of greater risk management, cost-efficiency, transparency and focus can make it one of the easiest as well.