Conservative Core Satellite Portfolio

The ‘best’ balanced portfolio has drawn quite interests from our users. The portfolio 50 To 70 Percent Tactical Balanced Portfolio at times can allocate as much as 70% to stocks (S&P 500 fund like VFINX) and as little as 0% when stock market is in a downtrend. It relies on our superior total return bond fund portfolio(s) to deliver above average returns in fixed income (for these portfolios, read many newsletters like March 26, 2018: Total Return Bond Update). 

However many users don’t feel comfortable with such a method that has all or nothing exposure to stocks. Not only this can suffer from whip-saw loss that is caused by selling stocks at a lower price only to buy back them at a higher price (as evidenced by last month’s behavior in the stock subportfolio), it also has a too high (70%) exposure in stocks when stocks are in an uptrend (thus short term volatility of the portfolio might be high). 

We have long maintained that a hybrid portfolio with both strategic (steady exposure in stocks and bonds) and tactical portions – so called core satellite portfolio – is a good trade off for investors who desire to have their portfolios to be somewhat in sync with broad markets (i.e. when stocks recover, there should be at least some stock exposure to enjoy this) while in the meantime to have a way to protect a large drawdown or interim loss that can last for as long as 10 years or so. In this newsletter, we show a simple way to develop such a core satellite portfolio.