If you remember the last time you had a balanced meal, it had a variety of fruits and vegetables with an adequate quantity of whole grains. Each of its constituents ensured sufficient macro and micronutrients to nourish your body. Besides these, you were also served something sweet at the end of the meal to put the icing on the cake.
After having the meal, you were content with what you had, knowing that it was good for your physical health. Now imagine if any one or two of its constituents were missing.
What if your meal did not have fruits or vegetables, or just had whole grains? How would you feel? NOT SATISFIED! Also, the absence of nutrients, provided by these vegetables and fruits in your diet for a prolonged period will prove detrimental to your body.
What if we told you that the same held true for your financial health and that your portfolio (read: diet) might be hurting you because it was not balanced?
The key to a portfolio-building exercise is identifying your financial needs and then having exposure to all those assets that have a role to play in your wealth-building process.
This means that you must own both – portfolios of stable and steady high-quality long-term compounders proving fundamental to capital preservation, along with shorter-term momentum and special situation bets offering outsized returns with proportional risk.
How do you solve this for your portfolio?
Enters Core-Satellite approach!
Under the Core-Satellite approach, the portfolio is divided into two portions – core and satellite.
Core, as the name suggests, constitutes the major part of your portfolio. Its central role is to provide stability to an investor’s portfolio by having allocations in fundamentally strong companies promising both, capital preservation and appreciation. This corresponds to boring daal-chawal-sabzi in the balanced meal that you know is good for you but you still try to downplay in every instance.
Then comes the satellite, where investors can allocate the remaining portion in sectors, themes and ideas which have the probability to earn relatively higher returns during a short to medium period because they are momentarily in favour. They are analogous to the sweet dish in your meal that you relish, but know too much of it isn’t good for your health (read: financial health).
With little moderation here and some compromise there, you can come up with a well-balanced portfolio, following the principles of the core-satellite approach. And that is how you take care of your financial health.