I wish I knew what core-satellite was, but I’m too embarrassed to ask

Investing strategies can be split into two broad types. Passive investments aim to earn the same return as the wider market as cheaply as possible, by buying all the stocks in an index such as the FTSE 100 or the S&P 500. Active strategies aim to earn a higher return by only investing in a smaller number of specific stocks or bonds that look particularly attractive. Core-satellite investing tries to combine both approaches to produce a portfolio that has low overall costs, but may still be able to beat the market.

The core of the portfolio is one or more passive funds. This investment will usually be as broad as possible: it will either track your main domestic stockmarket index or a global benchmark such as the MSCI World or FTSE World index. You might put 50% of your portfolio in your core fund or funds – the exact amount varies depending on your aims and how much risk you want to take.

The satellites are a series of smaller investments – in this case, you might hold five of these with 10% of the portfolio in each. These will often be active funds in areas in which you think that individual managers have a greater chance to outperform the market: in theory, a skilled manager should have more chance of beating the market in

under-researched small stocks than in large firms that are studied by many other managers and analysts. Alternatively, you might choose to use a tracker fund that focuses on a single country or sector if you think it looks very cheap or has excellent growth prospects.

Since each satellite is relatively small compared with the overall portfolio, core-satellite investing is only likely to deliver better performance if the potential returns in the satellites are significantly higher than the core. Portfolios that use lots of mediocre active funds in the satellites (or worse still, in the core) are unlikely consistently to do better than a broad passive fund, but will be more complex to run.