Investing Make Simple (Level 3)

1. Core-Satellite Strategy

• The core-satellite strategy is the combination of Passive Investing (core) & Active investing (satellite)
• This portfolio management strategy allow you to test out different investing method, while protecting your downside.
• The Core can simply be your Board based ETF (Level 1) or a MPT Portfolio (Level 2)
• Satellite investment are used to complement your core portfolio. You can either be a tactician a strategist or both.

2. General Rule

• General rule: Maintain not more than 20% of the portfolio in satellite.
• Of course, the amount of allocation to satellite is dependent to your risk tolerance.
• The higher the allocation to the satellite, the portfolio returns will deviate further away from the general market returns, may be a good or bad thing.
• Father of index investing, Jack Bogle, once wrote that what he call "funny money" should amount to no more than 5% of a person's invesment.

3. Risks Mitigation

• The risk mitigation are in general similar to what is mention in Level 1.
• Additional mitigation i would like to add for this portfolio management strategy: Invest with money you willing to lose.

• Because you may invest in something very risky, that may end up very badly for your satellite portfolio. eg. Crypto, NFT, Thematic ETFs, Unprofitable Companies ....

4. Satellite Portfolio Style

Strategist

• A strategist is someone who is more long term and focus on asset allocation.
• And they will maintain a fixed allocation in their portfolio and Rebalance periodically.
• Usually the satellite portfolio are make up of ETFs, they have to mitigate th idosyncratic risk because they are holding long term.

Tactician

• A tactician is someone who focus more on short to medium term.
• They hope to take advantage of market trends, economic conditions or percieve mispricing opportunities.
• They may also employ technical analysis and derivatives, like option, in their satellite portfolio to get short term gain.
• New investors may not be well-verse in all these tools and macroeconomic. Usually a tactician is a more experience investor.

5. How do i implement?

Tool: https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults

• if you are reading this you probably a new investors. Thus you should not be a tactician at this point of time.
• As a Strategist, is always good to do a backtest to compare the performance of the core-satallite portfolio to 100% core portfolio before taking any action.
• Past performance does not guarantee future performance, but it provide a guideline whether the core-satellite are able to generate excess returns. Below is an example.
• Two main parameters to take note CAGR (expected return) and Stdev (Volatility).

6. Conclusions

• Core-Satellite portfolio provide a chance to generate excess returns while limiting the downside risk based on portfolio allocation methology.

• As a new investor, being a strategist is an easier option as it is more mechanical and do not need any advance knoweldge in investing or macroeconomic. Just ensure the percentage allocation in the portfolio is always maintained.

7. Previous Post

Level 1

https://seedly.sg/opinions/investing-make-simple-level-1/

Level 2

https://seedly.sg/opinions/investing-make-simple-level-2/