How to beat the market with 2 kids and no time

What is a core-satellite portfolio and how should you build one with market beating companies like Xero Limited (ASX: XRO) and CSL Ltd (ASX: CSL)

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I love investing. I enjoy the chase of the research and the cut and thrust of the markets. It really is a process like no other.

For years I have actively manged my own ASX portfolio. But after adding two young boys to the mix, most of the 'active management' I do now involves naps and nappies! Try as I do, I just don't have the time to dig deep and scrutinise the 12-20 companies required to construct a diversified portfolio right now.

A great solution for me has been to set up a 'core-satellite' portfolio. This is an approach to stay diversified while still holding shares in my favourite companies like Pushpay Holdings Ltd (ASX: PPH) and Xero Limited (ASX: XRO).

What is a core-satellite portfolio?

In a core-satellite portfolio, the majority of your money is allocated to passive, low-cost funds, with smaller 'satellite' amounts of money allotted to specific investments that you keep a close eye on.

The ratio of core-to-satellite is up to you, but it might be something like an 80:20 mix of ETFs to satellite holdings. The mix will depend on how much energy you have to keep track of individual companies.

Building a solid 'core' portfolio

The 'core' of the core-satellite portfolio is often made up of very low-cost exchange-traded funds (ETFs) which track the returns of major indexes. 

For example, I could put half of my core allocation in the Vanguard Australian Shares Index ETF (ASX: VAS). This ASX listed index fund provides good local exposure and aims to track the return of the S&P/ASX 300 Index. Like all good Vanguard funds, the fees are low. At the time of writing, the fund had a tiny 0.10% per annum management fee.

The other half I could allocate to the iShares S&P 500 ETF (ASX: IVV). This fund tracks the United States S&P 500 Index and also has a ridiculously low management fee of just 0.04% per annum. A worthy addition in my view.

Juicing returns with market beating 'satellites'

The 'satellites' that surround the core are investments in companies that you think have a good chance of outperforming the wider market. In my case, because I think Xero has strong long-term prospects, I would want to hold some of its shares as a 'satellite'.

However, it's worth being mindful of not doubling up. For example, CSL Limited (ASX: CSL) makes up almost 8% of the holdings in the Vanguard ASX ETF. Adding CSL shares as a satellite as well might create more exposure to this one company than you want.

One kind of solution to one kind of problem

Now, you may be thinking 'why don't I just own a portfolio full of market beating satellites and be done with it?'. Remember that the problem I was trying to solve was to free up time. For me, this has been a way to keep a close eye on what is happening in the investing world, while still juggling naps and nappies.

Regan Pearson owns shares of PUSHPAY FPO NZX and Xero.

You can follow him on Twitter @Regan_Invests.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd., PUSHPAY FPO NZX, and Xero. The Motley Fool Australia has recommended PUSHPAY FPO NZX. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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