When it comes to managing investments, it’s easy to fall into the habit of following one approach. However, seasoned investors know that diversifying goes beyond asset classes. The key to building a healthy financial plan lies in combining different strategies, asset types, and investment tools that complement each other to achieve your financial goals.
Every investment tool and strategy offers its own advantages and disadvantages. To benefit from each, it’s important to move beyond a one-dimensional approach. By building a well-rounded investment mix, you can leverage their strengths and mitigate risks more effectively.
One effective way to apply a diversified investment approach is through core-satellite investing. This method divides your investments into two parts: a resilient “core” and smaller “satellite” investments aimed at growth.
Core-Satellite Investing
The core of your investment mix typically consists of low-cost investments like index funds or ETFs that cover a wide range of companies and sectors. These aim to provide steady returns over time and require little management. The core acts as the foundation of your investments, offering more stability even when markets fluctuate.
The satellite investments are smaller positions that target specific sectors or regions with the potential for greater returns. These allow you to take advantage of growth opportunities without putting all your investments at risk. This means you can potentially be more agile and tactical based on specific short-to-medium term goals or capitalize on short-term market views.
For example, a core-satellite investment mix could look like this:
Core Investments (70-80% of the portfolio):
– Multi-asset investment plan – A widely diversified, low-cost ETF-based investment plan with broad exposure across various sectors and regions, aiming to provide gradual long-term growth.
– Bond-based mutual fund – A lower-risk investment type that aims to provide regular income through a mix of government and corporate bonds, helping to balance overall risk.
Satellite Investments (20-30% of the portfolio):
– Equity-based mutual fund in emerging markets – A higher-risk mutual fund targeting stocks in rapidly growing economies, offering the potential for greater returns.
– Technology stocks – Choosing stocks in specific tech companies or sectors which are expected to have faster growth potential, offering a chance for higher returns in the short term.
Balancing Passive and Active Approaches
In a diversified strategy like core-satellite investing, balancing passive and active investments is important, as both approaches can complement each other.
The core of your investments focus on long-term progress, following a passive strategy to minimize risk and grow wealth with minimal involvement.
In contrast, satellite investments demand a more active role. These higher-risk positions require closer monitoring and quick adjustments to seize short-term opportunities. For active investments, you need to be more engaged and ready to make changes based on market conditions or news.
This balance between passive and active approaches allows you to maintain the relative steadiness of the core while actively pursuing growth through the satellite investments.
How It All Fits Together
Diversification in this context means embracing a mix of strategies that work together. By taking a core-satellite approach, you combine the relative steadiness of passive investments with the growth potential of active investments.
This allows your investments the flexibility to adapt and grow, without compromising its foundation. The more versatile your investment strategy, the better equipped you’ll be to handle market volatility and pursue your financial goals over time.
