Focus on what matters. That’s Morningstar’s message on how to build the critical “core” component of your investment portfolio.
Asset allocation and a long term buy-and-hold strategy aren’t as exciting as trading. Yet Morningstar explains how a strategic asset allocation strategy can do the bulk of the work within a long term investment strategy, using exchange traded funds.
“A popular and effective way of segmenting your investments is the ‘core and satellite’ approach. Here, you might categorize 80% of your overall portfolio as the ‘core’ and the remaining 20% as the ‘satellite.’ The satellite portion of the portfolio is where to express your tactical views on the market,” John Gabriel for Morningstar wrote.
The “core” of a portfolio should be invested into a long term asset allocation strategy, with re-balancing needed maybe once per year. A very general allocation is about 60% of holdings put into stocks, and 40% invested in bonds. Investors will vary and personalize this depending on investment horizon, goals and risk tolerance.
A good base holding is an ETF such as Vanguard Total World Stock Index ETF (NYSEArca: VT) which is representative of about 85% of the globe’s total world stock market capitalization. The largest risk to a fund such as this is the currency risk, due to it being denominated in U.S. dollars. A good rule of thumb when considering core holdings is that the ETF is passive, low-cost, and gives diversified equity exposure. [ETF Chart of the Day: VTI]