The investing strategy for those who like to pick winners

Core-Satellite allows you to reliably build wealth, while also indulging in riskier choices. Photo / File

COMMENT:

The Herald's Cooking the Books personal finance podcast is here to get you the tips you need to weather the financial storm. Hosted by Frances Cook, with a new expert on each episode.

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.

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Regular investments into index funds are a simple way for the average person to create a reliable investment strategy.

In fact research from the Wall Street Journal in 2016 showed up to 93 per cent of US managed funds were beaten by the closest comparable index fund.

It's the equivalent of investing in the entire economy. Sure, some businesses may be shooting stars, but others can collapse.

When you buy into a broad index fund you give yourself the average results of everyone.

Because while companies can boom and bust, economies themselves just keep marching forwards.

And yet, and yet.

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.

So how do you deal with this irrational side of yourself that hopes to hit it big, while still building real wealth that you can rely on for your future?

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.

You already see how this can work. The majority of your money is doing what's proven, making sure you don't end up broke and frustrated.

But you get a reasonable minority to still let you feel more engaged with your investments, and try for those moonshots.

On the latest Cooking the Books podcast I talked to Kernel's Dean Anderson, who advocates the method.

He said it's a ratio that works.

"Really it's designed to minimise costs, tax, and lower volatility for your portfolio.

"[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. That's your thing on the side where you can have a little investment in a direct share, maybe some private equity, any investment that's slightly higher risk.

"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."

A full discussion is on the latest Cooking the Books podcast, including how to vet what you put into both the core and satellite sections.

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