Core and Satellite
A core-and-satellite portfolio puts most of your money in broad, low-cost funds and a smaller slice in ideas you pick yourself. Here is how it works and how to size each part.
The idea
The core is the foundation: one to three broad, low-cost index funds that own thousands of companies. It does most of the work and does not depend on your stock-picking. The satellites are a smaller slice for individual stocks, sector funds or themes you believe in. If a satellite goes wrong, the core keeps the portfolio on course.
A simple core: U.S. stocks, international stocks and bonds.
How big is each part?
| Investor | Core (index funds) | Satellites (your picks) |
|---|---|---|
| Brand new, still learning | 90%–100% | 0%–10% |
| Some experience, follows the market | 80%–90% | 10%–20% |
| Experienced, with a tested process | 70%–80% | 20%–30% |
Common ranges, not rules. Many successful investors hold only the core.
Why this structure works
- Your results never depend entirely on a few picks.
- The core keeps costs low and diversification high.
- Satellites let you learn and act on ideas without betting everything.
- You can compare your satellites with the core to see if your picking adds value.
An example
Say you have $20,000 to invest for the long term. You might put $17,000 in a total-market or S&P 500 index fund and an international fund, and $3,000 into three stocks you have researched, about $1,000 each. If one of those stocks falls 40%, the whole portfolio drops about 2%. If one doubles, the portfolio gains about 5%.
Keep the satellites in check
Satellites that do well can grow into a big part of the portfolio. Set a limit, such as 20% for all satellites and 5% for any one stock, and trim back when you cross it. That keeps a hot streak from quietly turning into a concentrated bet.
Trim what grows past its target to keep the mix in line.
Key takeaways
- The core is broad, low-cost index funds; it does most of the work.
- Satellites are a smaller slice for your own picks.
- Beginners often keep 90% or more in the core.
- Cap satellites in total and per stock.
- Compare satellites with the core to see if picking adds value.