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Is A Satellite Investing Strategy Right For You?

Coming up with your own investing strategy and financial plan is a very personal process. There will always be recommendations but, in the end, it has to be something that you are comfortable with. However, there are basic tenets that I strongly believe in. With this being said though, this post will discuss a satellite investing strategy and if it is right for you.

satellite investing plan

What is the best way to invest?

Most of you can guess where I come down on this.

I am a big proponent of index fund investing. I discuss this at length in many blogs posts like this one and this one.

But here is a quick recap…

When you buy a company’s stock, you are saying that you believe in that company’s success. If you are right, like with Apple, you make a lot of money. If you are wrong, like Enron, you lose all of your money.

Picking the right company, or horse, can be difficult even for the “experts.”

How difficult? Well, research shows that even “experts” underperform the overall stock market 80% of the time when they try to actively invest by timing the markets and picking stocks or funds.

In converse, when you buy the whole U.S. stock market, you are saying that you believe in the overall ingenuity and innovation of humankind and the U.S. economy

So if you make this bet and you are right, you make money. If you are wrong, the economy and civilization as we know it collapses. Your portfolio will be the last thing on your mind. Everything to gain and nothing to lose.

Betting on the whole stock market is a much safer bet.

You do this with index funds. And you can pick index funds of stocks, bonds, and/or real estate.

So, my recommendation is to set an asset allocation of broadly diversified index funds in stocks, bonds, and maybe real estate (REITs) and invest passively by rebalancing back to your asset allocation yearly.

And if that sounded like gibberish, this post on asset allocation and rebalancing will explain it from A to Z so you can easily do this yourself!

So what is a satellite investing strategy?

A satellite investing strategy is one where the core of your investments are in passive broadly diversified, low cost index funds.

But you also have “satellites” of actively managed accounts or individual stocks floating around that core.

That’s the basic definition.

But there is a lot of wiggle room in that. How much of your portfolio is the “core” and how much are “satellites”? What “satellites” are you actually investing in? Does cryptocurrency count as a “satellite”?

I don’t know that answers to this and no one else does. It goes back to being personal.

Could a satellite investing strategy right for you?

It may seem strange that I am talking about this because I am such a big fan of passive investing strategies. And all of my stock portfolio is in passively managed index funds.

Even more, most of these potential satellite investments are included in my 3 most tempting investments to avoid.

But, if someone is going to invest in these types of things, it is much better to do so via a satellite investing plan than some other plan where they comprise a majority of the portfolio.

So then let’s get into the nitty gritty of what I think makes up a reasonable satellite investing plan…

What percentage of the portfolio should be in “satellites”?

In my mind, a good satellite portfolio is akin to having just some play money in your satellites.

The moon is the earth’s satellite. But the moon is 27% of the earth’s size. That’s way too much satellite for investing.

To me, absolutely no more than 10% of your portfolio should be in these satellite individual stocks, actively managed funds, or other things.

Ideally it would be 5% or less.

This way, you get to experience the “fun” that comes with speculation in a way that won’t significantly impact your financial foundation if when it underperforms your passive investments in the long term.

What is and isn’t a “satellite”

I’m not dogmatic on this.

Basically anything like an actively managed fund, individual stocks, cryptocurrency, SPACs, etc. can be a satellite in your investing plan.

So does that make real estate investing a satellite?

I’m going to say no.

I think investing responsibly in real estate either directly with cash flowing rental properties or indirectly via syndications or funds is a part of the core for those so inclined.

Now, investing in raw land or investing for market appreciation, those are satellites in my mind.

The main benefit of a satellite investing plan

To show you why the satellite investments don’t work. That the main advantage in my mind.

If you read the research and the blogs and your head knows that a passive investing strategy is the way to go. But your heart or gut still tells you to invest in individual stocks or NFTs. Then a satellite investing plan is a great place to start.

Do it for a bit, see how your satellites perform. And one of a few things will happen:

  1. Your satellites will underperform and you’ll get tired of them and eliminate them from your investment plan,
  2. Your satellites will have a huge jump in value and then fall thanks to volatility, so you’ll get tired of it and eliminate them, or
  3. They will have a huge jump in value and you’ll get lucky, sell at the peak and make out with some profit

All of these situations are a win as long as you don’t get lucky and think you will keep getting lucky.

So, recognize luck for luck and you will be ok.

The other alternative

Just ignore fad investments, stop trying to beat the market (not gonna happen), invest in broadly diversified low cost index funds, and chill.

Focus on the other important stuff in your life knowing that your investments are safe and getting you to your financial goals.

And if you still need help coming up with your written financial plan, use mine as a template!

What do you think? Do you use a satellite investing plan? Why or why not? What percentage of satellites do you think is just right? Let me know in the comments below!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected].

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