Resurrecting the Core Portfolio

Professional stock pickers are having a difficult time (again) beating the market. Lipper estimates that 85% of large-cap fund managers unperformed their benchmark last year. That’s the worst showing in three decades!

This kind of pathetic performance, especially during a favorable period of performance for stocks, is getting more advisors to rethink how they construct client investment portfolios. In particular, it’s pushing advisors toward a strategy of core/satellite with the core being indexed via low-cost ETFs.

The core portfolio always consists of broadly diversified funds that touch major asset classes like equities in developed and emerging markets, bonds, commodities and real estate. Think about the core as a portfolio’s foundation. And that foundation, just like one supporting a building, should be solid enough to withstand the fiercest of storms.

Putting non-core asset classes like individual stocks, actively managed funds, private equity, venture capital, managed futures, derivatives and collectibles inside a core portfolio is like putting ice cream into the oven. It doesn’t belong there! These types of non-core assets are complementary to a person’s core portfolio and are best kept inside a satellite or non-core portfolio.