This approach tends to be accompanied by higher costs and low levels of tax efficiency. Another popular approach is to be fully indexed to a broad benchmark. While this approach will keep returns generally in line with a benchmark, portfolio performance will typically underperform due to fees and virtually no opportunity to outperform. Then there is what is termed the Core Satellite approach which brings together bits and pieces of both the fully active and fully indexed approach.
The Core Satellite approach is displayed in the image below.
As you can see, the core typically represents a low-cost mix of funds and ETF’s
that are intended to closely track a given benchmark’s performance. This more passive allocation is typically
constructed to deliver market returns in a low-cost manner with an eye toward
tax efficiency achieved view generally low turnover. The core is then flanked
by a combination of satellite strategies that offer an opportunity to
outperform the market. These strategies typically will make up a smaller part
of the overall portfolio, but because they can be more concentrated can still
deliver outperformance. By constructing a portfolio in this manner, an investor
can express long-term views in the core while the satellites allow for
expressing more short-term views that might generate incremental alpha, while
at the same time not endangering long-term financial goals.
A couple of weeks ago in this newsletter, we highlighted
capital market assumptions and how they play a role in portfolio construction.
If you recall, we touched on how they help investment managers determine their
strategic asset allocation. For our readers that may not be familiar with the
term strategic asset allocation, one might think of it as a longer-term view of
how portfolios should be constructed. More specifically it is a determination
of how much should be invested in broad categories like stocks and bonds, or at
a more granular level between specific exposures. The strategic asset
allocation ultimately serve as the target weights that a portfolio is
periodically rebalanced to. This is really what is represented in the Core
within the Core-Satellite Approach.
The table that follows shows some hypothetical allocations
using a strategic allocation approach. As you might notice, the allocation between
each asset class category is driven by risk tolerance. For more aggressive
investors this may translate into a strategic asset allocation that is more
heavily weighted toward stocks while for more conservative investors it may
lead to a strategic asset allocation that is more heavily weighted toward
To determine the specific weightings, modern portfolio
theory is used to put portfolios along what is called the efficient frontier,
where returns are maximized for a given level of risk or where risk is
minimized for a given level of return. The efficient frontier represents a set
of optimal portfolios. As the next figure shows, there is a region under the
curve that is attainable but the most optimal portfolios would be found along
the curve that represents the efficient frontier.
Getting this part of the equation goes a long way toward helping an investor achieve their longer-term goals. The other part entails having access to a wide array of strategies that can be complementary to the Core’s strategic allocation and provide an investor with either the ability to generate incremental alpha or mitigate risk.
STA Investment Committee Luke Patterson, CEO & Chief Investment Officer Andrei Costas, Portfolio Manager Nan Lu, Senior Portfolio Manager Robin Chan, Senior Trader
Protecting Your Loved Ones with Life Insurance By Scott A. Bishop, MBA, CPA/PFS, CFP
How much life insurance do you need? Your life insurance needs will depend on a number of factors, including the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you’re young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows your need for life insurance increases. Here are some questions that can help you start thinking about the amount of life insurance you need.
Important Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA Wealth Management, LLC. Please remember to contact STA Wealth Management, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. STA Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the STA Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.
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