Most investors want the same thing from their portfolios - a balance between volatility and growth. Or in other words, just the right amount of risk and reward.
To achieve that you need to understand the concept of core-satellite investing. This framework can help you decide which investments to buy so that your portfolio is in perfect equilibrium (and thankfully, it’s super simple).
Understanding the 80-20 guide
Core-satellite investing involves allocating the ‘core’ of your portfolio (around 80-90%) to broadly diversified low-cost index funds.
The rest (10-20%) are your satellite investments. They can be a bit more speculative and volatile, but there may be potential for sky-high returns - investments like individual shares and thematic funds are ideal.
The idea is that your core performs roughly in line with the market, then your satellite may outperform - possibly providing a bump in returns (without risking it all).
How to follow the core-satellite rule
Step one - build your core
Step one of building your core-satellite portfolio is to put together your core. Investors usually weight this portion of their portfolio towards larger companies, diversified across industries. Buying index funds makes this a lot easier, as they’re diversified, low cost and ready to go.
It’s also worth thinking about how you split your core between NZ and global investments. While New Zealand makes up less than 0.3% of global GDP, there are some advantages to investing closer to home such as reduced currency cost, and better tax treatment.
Here are some examples of Kernel funds you could use as part of your core:
These index and managed funds are already diversified (hold 20+ companies), they are biased toward the largest companies, and are split across several different industries so they tick all the boxes.
Step two - launch your satellites
Satellite investments can be more speculative, and less diversified than core investments, but that also means there’s a chance that they could go to the moon.
Kernel’s newest product, Shares & ETFs, provides everything you need to custom build the satellite portion of your portfolio. It gives everyday Kiwi investors like you direct access to a selection of US shares and ETFs in NZD with super-low fees.
These assets have been carefully selected to help reduce complexity, so you don’t need to do hours of legwork, researching hundreds of options.
Step three - automate and review
A great man* once said that for most people investment success doesn’t come from taking huge risks, or picking winners. Instead, it’s about small actions, taken regularly over time.
That’s why once you have your core and satellites sorted it’s a great idea to use Kernel’s Auto-Invest feature to set and forget your investments. Then you can set it up, sit back and watch your portfolio grow.
A note on investment horizons
It’s important to think about your investment horizons when you’re building both your core and satellite investments. Your investment horizon is the length of time you’re planning to invest your money.
If you’re going to need the money in a year or two to buy a home, for example, you may want to put your money mainly in cash and other conservative investments. You might also want to decrease or eliminate the proportion of your portfolio dedicated to riskier satellite investments.
On the other hand, if you’re investing for retirement in 10+ years, you may want to choose more volatile investments, such as equities and individual shares. Depending on your appetite for risk, you may even want a larger proportion of more volatile satellite investments (say 20%).
Want more tips about building a diversified portfolio?
Read our article on How Can Kernel Funds Fit Together, or find out more about Kernel’s new home for satellite investments.
*That man is Dean, Kernel’s CEO. We think he’s great anyway.
Disclosure: Past performance does not indicate future returns. The example provided is hypothetical and for illustrative purposes only. It is not intended to be taken as personalised financial advice.
The investment strategy and allocations described are based on general principles and may not be suitable for every individual. Readers who are unsure may wish to consult with a licensed financial advisor to determine the best investment strategy for their specific circumstances.
