My Approach to the Core/Satellite Strategy: Balancing Stability and Growth
Navigating the ups and downs of today’s financial markets can feel overwhelming, especially when you’re trying to balance stability with growth. Years ago, I stumbled upon the Core/Satellite strategy while reading a book on investment management, and it was a game-changer for me.
At the time, I was searching for a way to build a portfolio that could secure my financial future without requiring me to spend countless hours managing it. The Core/Satellite approach fit perfectly—it offered the steady hands-off growth I wanted, while still leaving room for exciting, high-conviction opportunities.
This strategy originally comes from institutional investors, such as pension funds and endowments, who needed to manage large portfolios efficiently. It struck a balance between low-cost, broad-market exposure through index funds (the “core”) and more tactical, higher-risk investments (the “satellites”). As index funds and ETFs became more popular in the 1990s, individual investors like me started adopting the same approach to benefit from both passive and active strategies.
In this post, I’ll take you through how I’ve customized the Core/Satellite strategy to fit my personal goals and why it’s become the cornerstone of my long-term financial plan. Whether you’re looking for a smarter way to structure your investments or just curious about the strategy, I think you’ll find some helpful insights. Let’s dive in!
Understanding the Core/Satellite Strategy
Before diving into my personal approach, it’s important to understand the origins and principles of the Core/Satellite strategy. At its core (pun intended), this strategy is about balancing the stability of reliable, long-term investments with more dynamic, higher-risk opportunities that can potentially deliver outsized returns.
Origins and Purpose of the Strategy
The Core/Satellite strategy originated with institutional investors—pension funds, endowments, and large investment firms—who needed to find an optimal way to manage vast portfolios. These institutions required a method to provide stable, long-term growth while also allowing room for more active, opportunistic investments. By dividing portfolios into “core” and “satellite” segments, they could achieve both objectives.
Why Has the Strategy Grown in Popularity?
Several factors have driven the rise in popularity of the Core/Satellite strategy:
Balancing Risk and Reward: The strategy provides a way to balance dependable, long-term investments with a smaller portion of the portfolio devoted to more speculative, high-growth opportunities. This balance helps mitigate risk without sacrificing the chance for market-beating returns.
Personalization: Investors can hand-pick stocks that align with their beliefs, research, and market outlook. This customization makes the strategy appealing, as the core and satellite selections can be tailored to different risk tolerances, goals, and preferences. The satellites, specifically, offer a lot of room for each investor to focus on highly specific industries, asset classes and so on.
Stability with Opportunity: This strategy allows for stable growth, anchored in reliable, hand-picked stocks, while providing the flexibility to seek alpha in the satellite portion through more active management.
Time Efficiency: For investors who don’t want to spend all day monitoring their portfolios, this strategy offers a "best of both worlds" approach. The core can remain steady with minimal management, while the satellite positions require more focused attention.
The Core: Stability Through Hand-Picked Stocks
In the Core/Satellite strategy, the core is the foundation, designed to provide stability and consistent growth. Unlike the typical index fund approach, my core investments consist of hand-picked stocks that I believe offer reliable long-term growth. I allocate around 70-80% of my portfolio to these stocks, which I’ve chosen for their proven business models, strong financials, and ability to perform well through various market cycles.
My core portfolio focuses on companies that have been industry leaders for years or even decades. Think of blue-chip stocks—companies like McDonald’s —that have consistent earnings, strong cash flow, and low volatility compared to the broader market. These companies tend to perform steadily even in volatile markets, providing a reliable foundation for growth.
The Satellites: Targeted Active Investments
While the core is built around stability and reliability, the satellite portion of the portfolio is where I pursue active strategies to seek outperformance. Typically, 20-30% of the portfolio is allocated to satellite investments, which are more speculative and focused on high-growth opportunities.
I focus on specific industries and companies that I believe have the potential for significant growth, or companies that offer high dividends and align with my goal of creating monthly income. This part of the portfolio allows for a more tactical approach and the ability to capitalize on trends that may outperform the broader market.
Why Active?
While the core provides steady, reliable returns, the satellite portion allows for more speculative, tactical investments. This is where I can apply my research and take higher-risk positions with the potential to significantly boost my portfolio’s overall performance.
The Balance: Why It Works
The beauty of the Core/Satellite strategy lies in the balance it strikes between stability and opportunity. The core provides a solid foundation, composed of hand-picked stocks with a history of reliability, consistent growth, and stability through market fluctuations. These core holdings offer peace of mind, knowing that the bulk of the portfolio is well-positioned for long-term success.
At the same time, the satellite portion offers the excitement and opportunity to capitalize on emerging trends, sectors, or individual stocks that could outperform the broader market. By keeping this portion of the portfolio smaller, I can take on more risk without jeopardizing my entire financial plan. This balance between steady, dependable growth and high-potential opportunities is what makes the Core/Satellite strategy so effective.
My Core: Building a Stable Foundation
For me, the core of my portfolio is all about consistency, stability, and generating a reliable inflow of cash. I allocate around 70-80% of my total portfolio to a hand-picked selection of dividend-paying stocks and one gold ETF, all chosen for their solid fundamentals and long-term growth potential. The focus here is not just on growth but also on steady dividends that provide regular income, which is a key part of my strategy.
Why This Core?
My core is designed to provide reliable growth while minimizing risk. I hand-pick stocks from large, stable companies with proven track records, aiming to build a portfolio that can weather economic downturns. Importantly, all my core holdings must pay dividends—this is a non-negotiable requirement for me that comes with one single exception. While I’m willing to accept lower yields from some of these companies, the dividend must be more than 1% to ensure a steady stream of cash flow.
The stability comes not only from the solid performance of these companies but also from their dividend payouts, which provide a cushion during market volatility. Additionally, I include gold as a hedge against inflation and to stabilize my portfolio when equity markets experience turbulence.
My Core Holdings
Here’s a breakdown of the specific stocks and allocations that make up the core of my portfolio:
Siemens
As a global leader in industrial manufacturing, Siemens is a staple in my portfolio. Its diversified business model, covering everything from automation to energy, makes it a reliable growth stock with solid dividends. Siemens offers both innovation and consistency, giving me exposure to industrial growth with relative safety.
Gold ETF
I include gold as a hedge against inflation and economic instability. The gold ETF adds stability to my core by performing well during inflationary periods or market downturns. While it doesn’t pay dividends, it acts as an important stabilizer in my portfolio, balancing out more volatile stock holdings.
McDonald’s
McDonald’s has an interesting relationship with economic cycles. In tough times, people tend to shift toward more affordable food options, which often boosts McDonald’s performance. It’s a classic defensive stock, and its consistent dividend makes it a valuable piece of my core.
Coca-Cola
A classic blue-chip stock, Coca-Cola offers a combination of stability and consistent dividend payouts. As one of the largest beverage companies in the world, its global market presence and brand strength give me confidence that it will continue to be a reliable performer. Coca-Cola is a great example of a core holding that isn’t going anywhere anytime soon.
Caterpillar
Caterpillar is deeply tied to the health of the U.S. infrastructure and construction sectors, making it a solid bet for long-term growth. Its dividend payouts, combined with its central role in the global construction industry, make it a key part of my strategy. I expect Caterpillar to benefit as governments invest in infrastructure, especially with increased attention on U.S. infrastructure renewal.
My Satellites: Where I Seek Alpha
While my core investments are focused on stability and consistent growth, the satellite portion of my portfolio is where I take a more active approach to pursue higher returns. Around 20-30% of my portfolio is allocated to these high-conviction, targeted opportunities. Currently, I have three primary satellite strategies: financial institutions, heavy industry, and cryptocurrency. Each of these satellites is chosen for its growth potential and, in most cases, its ability to provide strong dividends.
Financial Institutions: Dividend Powerhouses
My satellite in financial institutions focuses on North American and European banks and insurance companies, which are known for their stability, strong dividend payouts, and shareholder-friendly practices. These companies have a history of delivering consistent cash flows and dividends, making them an attractive addition to the portfolio. Below is a deeper analysis of the dividend yields for each holding within this satellite:
National Australia Bank (NAB): Dividend Yield: approx. 5.70%
NAB has a long history of generous dividend payouts. Its strong position in the Australian market makes it a steady performer, and its dividend yield reflects a commitment to returning value to shareholders.
Paribas BNP: Dividend Yield: approx. 6.30%
As one of Europe’s largest banks, Paribas BNP offers both growth and income. Its dividend yield is among the highest in the sector, making it a valuable part of this satellite.
Zurich Insurance: Dividend Yield: approx. 5.90%
Zurich is one of the most respected insurance companies globally, and its high dividend yield makes it an attractive holding for income-focused investors.
AXA: Dividend Yield: approx. 6.10%
AXA consistently delivers strong dividends, bolstered by its solid earnings in the European insurance market. Its yield provides both growth and income potential.
Royal Bank of Canada (RBC): Dividend Yield: approx. 4.50%
Although its dividend yield is slightly lower than some others in the satellite, RBC remains a stable and well-managed bank with a long history of increasing dividends.
BBVA: Dividend Yield: approx. 5.85%
BBVA offers strong income potential, benefiting from its operations in Spain and emerging markets like Latin America, where it has a significant presence.
Yield of the Financial Institutions Satellite:
With this diversified group of banks and insurance companies, the average dividend yield for my financial institutions satellite is approximately 5.72%, providing strong cash flow while offering exposure to both European and North American financial sectors. This focus on dividends ensures that even during periods of lower stock price growth, my satellite continues to generate a steady income.
Heavy Industry: My Link to Global Commerce
My heavy industry satellite covers a range of companies involved in global commerce, including mining, energy, chemicals, and shipping. These industries offer both stable growth potential and high dividend yields, which make them ideal for this satellite portion of my portfolio. This diversification across sectors helps reduce sector-specific risks while maintaining a solid income stream.
Star Bulk Carriers: Dividend Yield: 11.00%
Star Bulk, a major player in the global shipping industry, offers an extremely high dividend yield, reflecting both its cash flow and cyclical nature. The high yield compensates for the volatility that sometimes affects shipping stocks.
Rio Tinto: Dividend Yield: 6.00%
Rio Tinto is one of the world’s largest mining companies, offering stable cash flows from its diversified operations in minerals like iron ore and copper. Its high dividend yield is backed by solid earnings.
Enbridge Inc.: Dividend Yield: 7.20%
A leader in energy infrastructure, Enbridge’s dividend yield reflects its strong position in North American energy transportation and distribution, providing both stability and a steady cash flow.
LyondellBasell Industries: Dividend Yield: 5.60%
LyondellBasell is a major player in the global chemicals industry, and its dividend yield reflects its consistent ability to generate profits and return capital to shareholders.
ONEOK Inc.: Dividend Yield: 6.50%
This U.S. energy company has a strong history of paying dividends, making it a valuable holding in my satellite for both growth and income.
Seaspan Corporation: Dividend Yield: 7.80%
Seaspan is another shipping company with strong cash flows and a high dividend yield. It operates in container shipping, providing exposure to global trade while delivering high dividend returns.
Yield of the Heavy Industry Satellite:
The average dividend yield for my heavy industry satellite is approximately 8.85%, reflecting the high payouts typical in industries like shipping, energy, and mining. This satellite not only provides steady income but also positions me to benefit from global economic activity and infrastructure spending.
Cryptocurrency: High Risk, High Reward
Cryptocurrency is a high-volatility asset class that can swing between massive gains and significant losses. I view it as a speculative but potentially rewarding investment, which is why I limit my exposure to no more than 10% of my entire portfolio. The crypto market can deliver highs that are difficult to match with traditional asset classes—my holdings have, at one point, reached a profitability of 80%. However, the extreme volatility means that I carefully monitor my investments here, understanding the risks involved.
In the making: the new satellites
The three satellites above have been in the making for years. I dedicated a lot of time into research each company, their market and the history of their dividend payments. While the holdings I mentioned above all grow slowly over time, I’m now researching and building the foundations of brand new satellites, with new areas of focus for my portfolio. These include:
Commodities ETFs: Commodities, particularly agricultural ones, offer diversification benefits due to their relatively low correlation with traditional equity markets. With a growing global population and increased demand for sustainable agricultural practices, investing in agriculture could provide long-term growth opportunities. Agricultural commodities often have a negative or low correlation with stock markets, not to mention that food prices tend to kick in when inflation rises.
Defense stocks: Investing in defense stocks could provide a strong hedge against geopolitical risks, especially if there is unrest or conflict in the Middle East. Defense companies typically have stable revenue from long-term government contracts, creating a more predictable cash flow for companies in this sector. This satellite will also have a low correlation with the broader market - so when everything else drops, this satellite will rise.
Physical gold: Buying into small gold coins with a purity of 98% gives me the chance to make small purchases as opposed to buying gold bars right off the bat. I’ve already begun buying Austrian ducats for this purpose as this makes my finances safer in times of economic instability and conflict in the world stage. It does bring factors like safe storage and insurance into the mix but it’s a burden I am willing to take on.
Lessons Learned: Patience is Key
One of the most important lessons I’ve learned throughout my investing journey is that time is essential for any strategy to bear fruit. Over the last seven years, I’ve watched my portfolio grow in value naturally, as the dividends reinvest and the markets recover from downturns. However, this growth hasn’t been without its challenges—economic hardship on the world stage has tested my patience more than once. Events like the COVID-19 crisis and the war in Ukraine caused my portfolio to dip significantly, just like most other investors.
In times of turmoil, it can be tempting to panic or shift strategies, but I’ve found that staying put and sticking to the core principles of the Core/Satellite approach has been critical. While my portfolio experienced temporary declines, it eventually bounced back, thanks to the stability of my core and the resilience of my dividend-paying stocks. Remembering that long-term investing is a marathon, not a sprint, has been crucial in maintaining my course, even when the markets were rocky.
What’s Next?
Looking forward, my goal is to continue growing both my core and my satellites in a balanced manner. The core remains the majority of my portfolio, providing a stable foundation of reliable dividend-paying stocks. As I build up the satellite portion, I aim to keep the core as the anchor, ensuring that it always represents the largest part of my portfolio.
My satellites are also a work in progress. I’m working towards fully funding my existing satellites—financial institutions, heavy industry, and cryptocurrency—to reach their target values. These satellites already play an important role in diversifying my portfolio and providing growth potential in areas outside my core.
But I’m not stopping there.
I plan to add new satellite strategies in the future to further mitigate risk and capture growth in emerging sectors. One satellite I’m particularly interested in building is focused on defense and military stocks. Historically, defense companies tend to perform well during times of global instability and conflict. By investing in this sector, I can create a hedge against the geopolitical risks that often cause my other holdings to dip. When the rest of the market suffers due to economic or political unrest, defense stocks are likely to hold up better or even outperform. This will add another layer of diversification and protection to my overall strategy.
Ultimately, I see my portfolio as a living, evolving entity that can adapt to changing market conditions. With a strong core in place and targeted satellites that can capture growth in specific areas, I’m excited to continue refining and expanding my strategy. The Core/Satellite approach has served me well so far, and I’m confident it will continue to do so as I fine-tune it to meet future challenges and opportunities.
Conclusion
The Core/Satellite strategy has proven to be a flexible and resilient approach for managing my investments over the years. It offers a balance between the stability of long-term holdings and the potential for growth through more targeted, higher-conviction plays. My journey with this strategy has been one of patience, discipline, and adaptation, especially during challenging times. By staying the course and continuing to refine my portfolio, I’m confident that this approach will help me achieve my financial goals in the long run.
Looking ahead, I’m excited about what the future holds. With plans to build new satellites and maintain a strong, dividend-focused core, I believe this strategy will continue to offer both security and growth. Whether you’re new to investing or a seasoned pro, the Core/Satellite strategy can be a great framework to help you align your portfolio with your financial goals while adapting to the ever-changing market landscape.