I already have a managed portfolio, can I still trade stocks on my own?
The world of investing is loaded with terminology.
There’s the alpha and the beta. There are P/E ratios and earnings yields. There’s a put option and a call option.
The list goes on.
And yet, amid this profusion of terms, there’s one term that needs little to no explanation: balance, the sweet spot of the risk-reward spectrum.
With a uniquely balanced portfolio, investors can take appropriate risks consistent with their financial profile and goals.
The eternal questions remain: how do you achieve such balance? And how can you trade stocks without undermining your overall financial strategy?
Or, what if you already have a managed portfolio? Can you still trade stocks on your own?
The answers to these questions are all rooted in the Core and Explore investment philosophy.
Also known as “core-satellite” investing, this tried and true method helps minimize costs and volatility while empowering you to invest in the companies that excite you most.
Core + Explore: Explained
Make no mistake: you can always invest what you want, where you want, however you want.
Still, history often teaches the best lessons, and modern financial advisors have inherited methods that provide a philosophical framework for their investing.
“Core and explore” is one such ethos.
Its design is simple, as core-satellite investing combines the primary advantages of index funds — like lower costs, lower volatility, and enhanced diversification — with the benefits of actively managed funds.
In providing the best of both worlds, core-satellite prioritizes passive, long-term investing while leaving room for select, short-term opportunities to outperform the index.
Pieces of the Pie: Structuring Your Portfolio
How should an investor structure their core-satellite framework?
Conventional wisdom advises putting the majority of your portfolio — around 70 percent — into your core holdings.
And what constitutes a core holding? Generally speaking, it comprises any quality investment deemed to have long-term potential.
Thanks to that rather subjective definition, the composition of optimal core holdings are in the eye of the beholder.
Still, most professional investors will agree that a core holding provides conservative, stable growth over an extended period of time. They’re the stocks you buy and hold over the long term.
Index funds are a primary avenue to such stability, as they typically have less volatility and drawdowns (i.e. a decline in value).
Because core holdings track indices — like the S&P 500 and Nasdaq-100 — they only change when the index itself changes.
As Warren Buffett once noted, “Most investors will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results, after fees and expenses, of the great majority of investment professionals.”
Mr. Buffett exudes total confidence in core holdings. And yet, men like Mr. Buffett don’t become moguls without also taking calculated risks.
That’s where the second part of the core-satellite framework — the exploration — comes into play.
Satellite stocks are typically more aggressive than core holdings, and they can help add “alpha” to your portfolio (i.e. excess returns above the benchmark). Unlike core holdings, which are passively held, satellite stocks are actively traded.
And while they only comprise a fraction of your portfolio — typically between 20 to 40 percent — satellite holdings exclusively focus on stocks with higher return potential.
While the risks are undoubtedly greater with satellite investments, so are the potential rewards.
After all, they provide the ability to target specific outcomes, to generate additional income, and ultimately, to outperform the index.
Key Benefits of Trading
Index funds provide tremendous long-term value.
Indeed, it’s no secret that the S&P 500 has generated an annual average return of 13.6 percent since 2011.
As such, core holdings should comprise the vast majority of your portfolio, thereby providing the financial base from which you can selectively choose your satellite investments.
But what if you already have a managed account? Should you even consider trading stocks on your own?
Absolutely. In fact, there are several great reasons to maintain autonomy in your portfolio.
For one thing, no one has a monopoly on good ideas. However experienced your money manager may be, the fact remains that they can only see the market through their own biases.
Even Warren Buffett misses opportunities and makes mistakes, as he freely admits.
Your perspective is valid. By investing outside your managed portfolio, you remain actively involved in the pursuit of your short and long-term goals.
Secondly, it’s very important for investors to engage with their portfolios in today’s economy. It’s all too easy to delegate your accounts to an advisor and bury your head in the sand.
The pace of change in the financial world is accelerating. By having your own satellite investments, you can protect yourself from being left behind.
If you have a managed portfolio, you need to have confidence in your allocations. You need to know where your money is invested and have the ability to raise concerns and share ideas with your money manager.
While financial advisors are responsible for a full roster of clients, you’re solely responsible for yourself.
By trading independently of your managed portfolio, you affirm your autonomy while holding your money manager accountable for their decisions.
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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.
