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Efficient Core & Satellite Portfolios

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While the past year has seen a steady, heady increase in the stock market and your account values, we know it won’t last forever. There will be another pandemic, another election, another war, another something—anything—that will cause markets to tumble. We want to be properly invested for when that market decline arrives, but we also want to enjoy the ride on the way up. 

We all know that stocks have historically been the greatest wealth creators, with real estate not far behind. Bonds, as rates have fallen since the early 1980s, have also been a great addition to investment portfolios; not only for income yield, but for price appreciation as interest rates fall. But with interest rates pegged near zero for the foreseeable future, the typical bond portfolio won’t provide much return, and may not prove to be the yin to the stock market’s yang that they’ve been over the last 40 years.

We’ve also noticed that over time, the best way to access stocks and bonds is through low-cost, tax-efficient passive ETFs. Stocks and bonds make up the “Core” of an efficient portfolio. The more interesting part of our asset allocation strategy is the bucket we call “Alternatives” — or Other. Not stocks, not bonds, but something that acts differently. There are many things to choose from; but some act like stocks or bonds—or both. High yield and convertible bonds act like stocks. Preferred Stocks act like bonds. Real estate often acts like stocks—but sometimes like bonds. We are aiming to add “true diversifiers” to your “Alternative” bucket, and ask you to consider these ideas: 

  • Precious metals and other commodities (gold, etc.). 
  • Trend following strategies (managed futures)
  • Institutional real estate portfolios
  • Volatility (what—how? Fun!)

We are building “Aggressive core & satellite” portfolios using a WisdomTree ETF (NTSX) as the core. This ETF gives you the traditional 60/40 stock/bond balance while only using 2/3rds of your portfolio balance to achieve it. Talk about an "efficient core"!

We are also building "Conservative core & satellite" strategies using the SWAN ETF as the core piece. SWAN invests 90% of its assets in U.S. Treasury bonds, while using the other 10% to purchase call options to capture upside in the S&P 500. 

Our focus at this point in the economic cycle is turning to wealth preservation. The U.S. government is passing more stimulus, driving us further in debt as a nation. At the same time, the Federal Reserve Board has indicated interest rates will stay near zero even in the face of higher inflation. The printing presses continue to run, adding $120 billion to the Fed's balance sheet each month.  

All this to say that we are looking to add assets to portfolios outside of typical U.S. large company stocks and government bonds. While the 60/40 stock/bond portfolio has traditionally provided great risk-adjusted returns, we want to prepare for GDP growth to slow and for lasting inflation (devaluation of the U.S. dollar).

We look forward to discussing one or more of the “satellites” you prefer added to an efficient core in your investment portfolio.