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Core-satellite investing is a method of portfolio construction designed to minimize costs, tax liability, and volatility while providing an opportunity to outperform the broad stock market as a whole. The core of the portfolio consists of passive investments that track major market indices, such as the Standard and Poor's 500 Index (S&P 500). Additional positions, known as satellites, are added to the portfolio in the form of actively managed investments.

Here is how core-satellite investing works:

Portfolio Construction
First, look at the core portion of your portfolio. The assets will be allocated to investments that are designed to be managed passively. For example, you could put half of the assets dedicated to stocks into an index fund that tracks the S&P 500.

For the actively managed portion, the goal is to select investments where a portfolio manager's skill provides an opportunity to earn greater returns than those generated by the passive portion of the portfolio.

In this example, you could put 10% of the portfolio into a high-yield bond fund and divide the remaining stock portion evenly between a biotechnology fund and a commodities fund.