On the Money: Core-and-satellite strategy

Many investors now dread their investment account statements, and some choose not to open them. While ignoring your investments may avoid costly knee-jerk reactions, lack of attention could cause you to miss the opportunity to prepare your portfolio for recovery.

Start by assessing your current investment portfolio in terms of your future plans. You may need to adjust both your goals and your plan in the context of reassessing your personal tolerance for risk.

Many investors react to market declines by deciding they need to move to the far end of the conservative spectrum. When you retreat to a conservative stance you must adjust your return expectation accordingly; virtually guaranteeing a longer recovery period. The question you may need to ask yourself is, “What is my true risk tolerance and how does that answer affect my ability to achieve my goals?” Getting comfortable with risk and its direct impact on attaining goals is one of the keys to living at peace and maximizing your financial objectives.

Establishing your true personal risk tolerance and time horizon leads directly to determining your target asset allocation. At its most basic level, asset allocation is the blend of stock market and fixed income investments to other assets in your portfolio. Traditionally, most investors would select their target asset allocation and adhere to it steadfastly, employing a classic buy-and-hold strategy. However, global economic and market developments have led to a paradigm shift in investment strategy. To enhance your recovery plan, consider employing a core-and-satellite approach instead.   

The core allocation strategy remains founded on long-term asset allocation and a buy-and-hold strategy. Within the core, there should be varying exposure to stocks, fixed income, cash, and alternative investments such as real estate, commodities and non-traditional investments. The allocation among these four principal asset classes forges a strong foundation for your investment portfolio.

The satellite portion is more tactical in nature and is designed to increase return to the portfolio without exposing the investor to a significantly increased element of risk. Here, the core portfolio is supplemented strategically taking advantage of opportunities the markets present. Macro-economic developments, short-term valuation dislocations, and even political forces are examples of events that may lead to opportunities that the tactical allocator seeks to profit from.

An appropriate combination of core and satellite allocations should be part of your recovery plan and should be closely monitored on a periodic basis.  


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