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Core Satellite Portfolio

Core and Satellite Portfolio

Core and Satellite Portfolio. One style of investing of investing for retirement is what many investors call Core and Satellite or Core and Explore portfolio investing. The two names are essentially synonymous now. Other names include the Barbell or Core Plus portfolio. The initial source of this portfolio strategy seems to be a study called “Core and Explore – An Effective Strategy for Building your Portfolio” by the Schwab Center for Investment Research from the late 1990s.

The three main conclusions of the original study were:

  • Core and explore portfolio reduced risk of underperforming compared to an all-explore strategy
  • Core and explore provided potential to beat the market compared to an all-core strategy
  • Emphasizing actively managed funds in higher alpha asset classes increased a portfolio’s potential to beat the market

The first bullet point above is certainly true since an all explore portfolio would likely be too volatile. But the second two bullet points are not true as we now know, more on this below.

Core Satellite Portfolio
Core and Satellite Portfolio

Historical Perspective of Core and Satellite Portfolio

The original idea of the core and satellite portfolio was to let you invest in both diversified passive index funds as the core of your portfolio and actively managed funds as satellite positions. An investor would pick diversified passive index funds as their core holdings. For instance, this could be a total market index fund, a total bond market index fund, and a total international index fund. For some investors, such as the Bogleheads, the 3 Fund Portfolio is all they need. But those who followed the core and satellite portfolio approach would add a smaller percentage of actively managed satellite funds. This could be in asset classes such as REITs, high yield bonds, small cap stocks, emerging markets, etc. The idea was to get some alpha in your portfolio.

Today, there are many practitioners of the core and satellite portfolio, especially for retirement plans. Search for core and satellite portfolio and you will get many, many results from investment firms and financial blogs. Most investment firms and financial planners have their own version of the core and satellite portfolio. This strategy can work for many people since it mostly requires you to make asset allocation decisions, which is fairly easy to do.

Modern Perspective of Core and Satellite Portfolio

However, there are a few problems with the original core and satellite portfolio strategy. The main one is that over time passive index funds will outperform actively managed funds regardless of asset class due to costs. That may not have been so apparent in the late 1990s, but it is now. 

Today we know that there are essentially no asset classes where actively managed funds beat passive index funds after expense ratios are considered. We all know that expense ratios impact returns resulting in lower total investor returns. Granted, there are some fund managers and actively managed funds that can beat their benchmarks over time, but they are few and far between. Furthermore, there is no way to identify these fund managers ahead of time.

Final Thoughts on Core and Satellite Portfolio

So, what to do? You could try a twist of the original core and satellite portfolio strategy for your retirement portfolio. But instead of using actively manage funds for the satellite part use passive index funds. In this way, you get exposure to other asset classes. Furthermore, by using only passive index funds your costs are low. To reiterate John Bogle’s statement on mutual funds, 

“First, in investing, realize that you get what you don’t pay for. Whatever future returns the markets are generous enough to deliver, few investors will succeed in capturing 100% of those returns, simply because of the high costs of investing—all those commissions, management fees, investment expenses, yes, even taxes—so pare them to the bone.”

What about my personal favorite of dividend growth investing? The costs associated with dividend growth investing are very low. Today, most brokerages are no longer charging commissions on trades or alternatively they have a subscription fee giving a certain number of free trades. Dividend growth investing uses a buy and hold approach. Hence, it is tax efficient since trading is limited and further taxes on qualified dividends are less than on ordinary income. My article on the advantages and risks of dividend growth investing goes deeper into the topic.


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Chart or Table of the Week

Today I highlight J.M Smucker Co (SJM). The food company owns some famous brands including Smucker’s, Folgers, Jif, 9Lives, Kibbles ‘n Bits, Meow Mix, Milk-Bone, etc. The company has raised the dividend for 24 straight years making the stock a Dividend Contender. The current dividend yield is about 2.8% and the payout ratio is a conservative 46%. There is little likelihood of a dividend cut or suspension now. Based on the past 5-years, the stock the valuation metrics are reasonable. The screenshot below is from Stock Rover*.

Source: Stock Rover*

Dividend Increases and Reinstatements

I have created a searchable list of dividend increases and reinstatements. I update this list weekly. You can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

I updated my dividend cuts and suspensions list at end of April. The number of companies on the list has risen to 523. We are well over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic.

There were two new companies to add to the list this past month. These two companies were HollyFrontier Corporation (HFC) and AT&T (T).

Market Indices

Dow Jones Industrial Averages (DJIA): 33,435 (+3.44%)

NASDAQ: 14,360 (+2.35%)

S&P 500: 4,281 (+2.75%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 45.5X and the Schiller P/E Ratio is at about 38.0X. These two metrics up down this past week. Note that the long-term means of these two ratios are 15.9X and 16.8X, respectively. 

I continue to believe that the market is overvalued at this point. I personally view anything over 30X as overvalued based on historical data. Note that we are near or over 40X and valuation levels near the top of the dot-com era.

S&P 500 PE Ratio

SP500 PE Ratio - Core Satellite Portfolio
Source: multpl.com

Shiller PE Ratio

Shiller PE Ratio - Core Satellite Portfolio
Source: multpl.com

Stock Market Volatility – CBOE VIX

The CBOE VIX measuring volatility was down about 5 points this past week to 15.62. The long-term average is approximately 19 to 20.

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Source: Google

Fear & Greed Index

I also track the Fear & Greed Index. The index is now in Fear at a value of 44. This is up 14 points this past week.

There are seven indicators in the index. They are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.

Put and Call Options are signaling Extreme Greed. In the last five trading days, put option volume has lagged call option volume by 60.29%. This is amongst the lowest level of put buying in the past two years.

Junk Bond Demand is indicating Greed. Investors are accepting 1.99% yield over investment grade corporate bonds. The spread is down further from recent levels indicating that investors are taking on more risk.

Market Momentum is indicating Greed. The S&P 500 is 6.71% over its 125-day average. This is further above the average than normal over the past 2-years.

Market Volatility is set at Neutral. The CBOE VIX reading of 15.62 is a neutral reading.

Safe Haven Demand is in Extreme Fear. Stocks have outperformed bonds by 1.61% over the past 20 trading days. This is close to the weakest performance for stocks over the past 2-years as investors move back into bonds.

Stock Price Strength is signaling Extreme Fear. The number of stocks hitting 52-week highs compared to those hitting 52-week lows is at the lower end of its range.

Stock Price Breadth is indicating Extreme Fear as advancing volume is 5.42% more than declining volume on the NYSE. This indicator is near the upper end of its range over the past two years.

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Source: CNN Business

Economic News

The National Association of Realtors reported that sales of existing homes fell -0.9% in May to a seasonally-adjusted annual rate of 5.80M, up 44.6% as compared to May 2020. This is the fourth consecutive month of decline. Sales of single-family homes fell to a 5.08M annual rate (+39.2%Y/Y) while existing condo sales remained at a 720K annual rate (+100% Y/Y). Total housing inventory reported in at 1.23M, up 7.0% over April’s inventory (-20.6% Y/Y). Properties typically remained on the market for 17 days, unchanged from April. Eighty-nine percent of the homes sold in May 2021 were on the market for less than a month. The median sales price increased to $350,300 (+23.6% Y/Y). The median existing single-family home price was $356,600 in May (+24.4%Y/Y) while existing condo price was $306,000 (+21.5%). Regionally only the Midwest saw an increase in existing-home sales (+1,6%). Sales dropped in the West (-4.1%), Northeast (-1.4%), and the South (-0.4%).

Fed Chairman Jerome Powell said in his testimony Tuesday before the Select Subcommittee on the Coronavirus Crisis that recent price increases are temporary and due to supply bottlenecks as well as extremely strong demand for labor, goods, and services. He also indicated that inflationary figures are skewed due to the sharp price drops that occurred at the pandemic’s onset. The Fed Chair acknowledged that “these effects have been larger than we expected, and they may turn out to be more persistent than we expected” and that “the incoming data are very much consistent with the view that these are factors that will wane over time and then inflation will then move down toward our goals.”

The Bureau of Economic Analysis’ third estimate on first quarter gross domestic product (GDP) growth reported an economy expanding at an annual rate of 6.4%, outpacing 4.3% for the fourth quarter.  Increases in personal consumption expenditures (PCE), nonresidential fixed investment, federal government spending, residential fixed investment, and state and local government spending were partially offset by decreases in private inventory investment and exports. Imports, which take away from GDP, increased as companies struggled with supply-chain issues.

Thanks for reading Core and Satellite Portfolio – Week in Review!


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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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