It’s called the CORE and Satellite strategy
Basically it means you build the bulk (or CORE) of your portfolio on a solid, dependable investment that’ll give you ‘dead average’ returns.
Then, you use the remainder of your portfolio to invest in high growth high risk (penny shares) shares to beat the average growth.
So how would you go about doing this?
Well, let’s say you have a por tfolio wor th R100,000. Normally you’d have invested in between 5 and 15 penny shares with that money right?
All you have to do is make this one change
You take half of your portfolio, R50,000, and invest that in a market tracking exchange traded fund (ETF). This would be the Satrix 40, Satrix Divi or Satrix Raf i. I prefer the Satrix Raf i. It has averaged 16.8% growth a year for the past three years so far, it is ver y stable and moves with less volatile movements than the Satrix 40 and the Satrix Divi hasn’t performed as well.
The reason you use an ETF is it guarantees you average market performance, which has been around 15-17% in the last two decades. So it gives your portfolio an ‘Ultra-Safe’ edge, while you still keep decent overall returns.
Then you can use the remaining half of your cash to invest in higher risk shares. If that portion of cash is R50,000 I’d say you should look at investing in 5-8 penny shares with that.
So what will your returns look like?
Well here’s two examples, one of them is for a portfolio of shares with four winners and one loser, from our Penny Share portfolio, the other is a worst case scenario – showing how you’d have done if you picked three losers and only two winners from our portfolio:
So in a decent year, where you have more winners than losers you could’ve made R20,689 with this ‘low risk’ portfolio. But if you had a horrible time and picked 3 losers and only two winners you would still have made some decent money with a return of R15,291 on your R100,000 for the year, protecting you and your returns from downside, without taking away the upside potential when you do well.
Another BIG benefit this investment technique has for you today….
As you know, costs make out a big portion of your spend as an investor. Buying and selling 10 shares (with R100,000) would costs you around R2,500 in a year.
But using this technique you’ll also save some money.
Firstly, you’ll be buying fewer shares. Let’s say half; meaning your costs on those will only be R1,250 for the year.
Then, you’ll still pay the brokerage on the ETF portion, but to buy your costs should be around R400, and this portion of the portfolio is something you hold on to, you don’t buy and sell as you see fit. You buy and hold.
So in year one your savings will be around R850 and from year two you’ll save about R1,250 a year. That’s enough to cover your Red Hot Penny Shares subscription in fact!
So, if you want to keep the profit charged potential of penny shares in your portfolio, but the volatility and risk is hard for you to stomach, implement this strategy today. You’ll see your portfolio’s value become more stable. Your risk will be less and you’ll still make good money!