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Jeff Binkley
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Mr. Binkley is the managing director of Binkley Wealth Management Group LLC, a fee-only, independent Registered Investment Adviser located in Avon, Indiana. Mr. Binkley has been an Investment Adviser Representative since 1993. In 2010, he formed Binkley Wealth Management Group as a wealth... More
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Binkley Wealth Management Group, LLC
  • How Does THE BIG MONEY Invest?  0 comments
    Jan 26, 2013 3:00 PM

    Ready to invest like large institutions do? Consider a core and satellite strategy.

    A client recently asked me, "Jeff, how does 'The Big Money' invest its capital?" It's a great question and the answer may surprise you.

    Many large institutions, including not-for-profit foundations, universities and endowments have a whole team of money managers employed to get the very best performance from their investments. But the method many of those managers follow is relatively simple and available to you and me.

    It's called the core and satellite investing strategy.

    A core and satellite investment portfolio is built using investments designed to keep costs down, minimize tax liability, and reduce volatility while providing an increased likelihood to beat the broader markets as a whole. The core of this kind of portfolio consists of passive (non-managed), lower-cost investments that track major market indexes. Those indexes can include domestic stocks, bonds and foreign stocks. Additional positions, called satellites, are added to the portfolio in the form of actively managed investments.

    How does a smaller investor lacking the resources of a large institution develop a core and satellite strategy for themselves? Surprisingly easily.

    First and foremost you need to determine the asset allocation that makes the most sense for you. You accomplish this by defining your goals, recognizing your personal circumstances and understanding your tolerance for risk. Once you identify these you can then determine the most appropriate asset mix for your portfolio.

    Next you need to decide what percentage of each asset class should be allocated to core index investments and what percentage should be put in satellite actively managed or specialty index investments. Ultimately, this balance between index funds will be governed by the degree of volatility you are equipped to accept.

    Lastly, you need to select the specific index and active investments that make up both the core and satellite.

    Core and satellite portfolios can be as risk-averse or as bold in their strategy as any other portfolio. The blend of investments you choose will depend on your personal investment objectives.

    But does it work?

    One thing is certain. There is no magic beans asset allocation strategy that will work for everyone. With that said many organizations with large assets to protect and grow while maintaining a high level of stewardship follow this core and satellite approach. Their research and experience has led them to believe this method provides an opportunity to have the best of both worlds. Better-than-average performance, reduced volatility and expense containment all coming together in a flexible box that can be designed specifically to accommodate each individual's needs and risk tolerances.

    IMPORTANT DISCLOSURES Any information, strategies and opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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