Core-Satellite Capital Allocation Strategy

Core-satellite is an allocation method that separates capital into a stable, low-cost core and smaller, active satellites. The structure forces a discipline that prevents the most common trader failure: betting everything on the strategy that is currently hot.

The structure

Core (60–80% of capital). A passive, low-turnover allocation: a broad index, a balanced fund, or a systematically rebalanced mix. The core's job is to capture market beta with minimal cost and minimal attention. Target volatility is the portfolio's anchor.

Satellites (20–40% of capital). Active, higher-conviction strategies where you believe you have an edge: a discretionary swing strategy, a quantitative signal, a sector tilt, or a thematic position. Each satellite has a defined thesis, a stop, and a review date.

Sizing the satellites

Cap any single satellite at 10% of total capital and the total satellite sleeve at 40%. Within satellites, allocate by conviction-weighted risk: a high-conviction satellite with 15% volatility gets more dollars than a low-conviction one with 25% volatility. A simple rule — equal risk per satellite, not equal dollars.

The core's job

The core absorbs the volatility the satellites cannot. When a satellite blows up, the core keeps the portfolio viable. This is why the core must be boring and low-cost: an actively managed, high-fee core is a satellite pretending to be a foundation. Use a total-market index or a 60/40 fund with an expense ratio under 0.15%.

Review and rebalancing

• Monthly: review each satellite against its thesis. If the thesis is broken, exit — do not wait for the stop.
• Quarterly: rebalance back to target sleeve weights. If satellites have grown to 50% after a bull run, trim to 40% and add to the core. This forces selling what is extended.
• Annual: evaluate whether each satellite earned its place. A satellite that underperformed the core over 12 months with higher volatility should be replaced or closed.

Why it works

The structure solves two problems at once. First, it prevents ruin — 70% of capital is always in something that cannot blow up. Second, it constrains overconfidence — the satellites are bounded, so a wrong conviction call costs 5% of capital, not 50%.

Common mistakes

• Satellite creep. Satellites grow to 60% after a good year and the "core" becomes decorative. Rebalance ruthlessly.
• Core-as-satellite. A "core" position that you actively trade is a satellite. Be honest about which is which.
• Too many satellites. Five satellites at 8% each is not a portfolio, it is indecision. Three to five satellites maximum.

The bottom line

Core-satellite is a commitment device. The core says "I will not bet the farm." The satellites say "I will pursue my edge within limits." The allocation between them is the single most important risk decision a trader makes, more than any entry signal.