Shoot for the moon with your ‘satellite’ stocks

Many think investing is a battle of knowing enough.

Sure, that’s an issue. You need to know some general rules of thumb, as a minimum. But the bigger battle is actually against yourself. That’s a conflict that can set up many of us for a fall.

It’s why we need investing strategies like the Core-Satellite technique to both reliably build our wealth, and indulge the part of us that likes to dabble with the wild side.

There seems to be a tendency for many of us to want to pick individual companies to invest in, even if we know it’s a riskier investing strategy.

I’ve talked to financial writers who will preach broad index investing in their columns, while picking individual winners for their own investments. They rationally know it’s less likely to work, but just can’t help themselves.

Or people on the street who say they know the general idea of funds, but “they’re sure this one’s a winner instead”.

Picking out individual companies to invest in can feel more like “real” investing. Or for some people, it’s just more fun. And, of course, there’s the possibility you hit it big.

Once in a blue moon, you might hitch your wagon to the next Apple or Facebook, before they explode.

It’s a bit like buying a lottery ticket. Most of us won’t win. But some do, and that has the rest of us queuing up around the country every Saturday, just in case.

Enter the Core-Satellite method.

The idea is that you keep the majority of your money in index funds. Many will say 80 per cent core, 20 per cent satellite, is the right mix. Really the core can be anywhere from 70 to 90 per cent, depending on how you want to run things.

The satellite is for those companies you want to pick out and invest more in, individually.

On one of the latest Cooking the Books podcasts, I talked to Kernel’s Dean Anderson, who advocates the method.

He said it’s a ratio that works. “[You have] the opportunity of still out-performing the market, but not putting your whole portfolio and wealth at risk on one or two direct shares,” he said.

“The boring part will give you stable and steady returns, as part of a good long-term investing strategy.

“Then these satellites are, in essence, your fun money.

“Those are the things that may outperform the market, but they can also underperform as well, so you don’t want to put everything into them.”