The idea
Most of the money sits passively, broadly diversified and cheaply in an index: the core. A small part may deviate: the satellites, with which you bet on specific markets, themes or companies.
Two observations sit behind it. First, the majority of actively managed funds do not beat their benchmark over long periods, as the SPIVA reports by S&P Dow Jones Indices have shown for years. A broad index is therefore a strong foundation. Second, many investors still want to act on their own ideas. The strategy gives that wish a limited space instead of making the whole portfolio depend on it.
The core
The core should do three things:
- Diversify broadly: many countries, sectors and companies, so that no single event decides the portfolio.
- Cost little: broad index ETFs often have running costs below 0.3 % a year. Over decades, every tenth of a percentage point makes a noticeable difference.
- Stay put: the core is not rebuilt when markets swing. It is the part of the plan where you have nothing to do.
Typical cores are ETFs on the MSCI World (about 1,400 companies from 23 developed countries) or on indices that also include emerging markets, such as the MSCI ACWI or the FTSE All-World with several thousand companies. In the MSCI World, the US share is about 70 %; a more global core or deliberate additions can balance that.
The satellites
Satellites are anything with which you deliberately deviate from the broad market. Typical groups:
- Regions and segments: emerging markets, Europe, small companies (small caps) that are underrepresented in the core.
- Factors: ETFs that pick cheap (value), high-quality (quality) or recently strong (momentum) stocks.
- Themes: health, robotics or renewable energy, for example. Often more expensive and more volatile than broad indices.
- Single stocks: the most direct form of an opinion, with the highest single risk.
- Stabilisers: satellites do not have to be riskier. Bonds or gold can make the portfolio calmer.
- Crypto: very high volatility, usually only a small addition.
How to split
Splits of 70/30, 80/20 or 90/10 between core and satellites are common. Which one fits depends less on a formula than on three questions: how much time do you want to spend on research? How strong is your conviction? And how much loss could you take in the satellites without doubting the core?
Two rules of thumb are common. First, each idea stays small, for example at most 5 % of the portfolio per satellite. Second, overlap is checked: holding a World ETF, a technology ETF and Apple as a single stock means betting on the same company three times.
What a satellite can do
How strongly the satellites’ result moves the whole portfolio, compared with a portfolio of only the core.
Portfolio after 10 years, satellite outcome over the whole period
7.0 % p.a.
5.3 % p.a. · −€29,507 vs. pure core
5.7 % p.a. · −€22,007 vs. pure core
6.2 % p.a. · −€14,507 vs. pure core
7.0 % p.a. · +€0 vs. pure core
7.0 % p.a. · +€493 vs. pure core
9.2 % p.a. · +€45,493 vs. pure core
Without rebalancing, costs and tax: the satellite is bought once and left alone; the core grows at its return every year.
With the starting values, a €100,000 portfolio, 15 % satellites, ten years and a 7 % core return, the pattern is clear:
After ten years
Satellites doubled: €197,208, only €493 more
Satellites total loss: €167,208 (5.3 % a year)
Satellites five times: €242,208 (9.3 % a year)
At 7 %, the core almost doubles in ten years on its own. A satellite that “only” doubles therefore adds hardly anything; it has to beat the core clearly to be worth it. At the same time, the small share limits the damage: even a total loss leaves the portfolio growing. That asymmetry is the whole point of the split.
Rebalancing
Over time, the shares drift: good satellites grow beyond their target, weak ones shrink. Three common ways to steer back:
- By time: check once a year and return to the target split.
- By threshold: act only when a share deviates by more than, say, five percentage points.
- Through new savings: direct new money to wherever the share is below target.
In Germany, the third way is usually the cheapest. Every sale with a gain triggers capital gains tax once the saver’s allowance of €1,000 a year (couples €2,000) is used up. Steering through savings shifts the shares without selling.
Core-satellite across all your wealth
The strategy is usually described for a portfolio. But if you also own property, a company pension or gold, ask the bigger question: what is the core of all my wealth, and what are the satellites?
A rental flat, for example, is a very large, very concentrated position: one property, one place, one tenant, plus a loan. Next to a €150,000 portfolio it is often the largest single asset. That is neither good nor bad, but it changes the picture: a portfolio that is neatly split into core and satellites can be part of wealth that, overall, leans heavily on one asset class. More in the guide Which asset classes, from what wealth?
Common mistakes
- Too many satellites. Ten ideas at 2 % each turn the portfolio into a collection without any of them moving anything.
- Buying satellites by past performance. Themes often become popular once they have already risen strongly.
- Overlooking costs. Thematic ETFs often cost several times as much as a broad index ETF.
- Touching the core. Rebuilding the core in weak phases loses exactly what the strategy is about.