Portfolio Frameworks
A structured look at how portfolios are built: modern portfolio theory, core-satellite construction, indexation, allocation across asset classes and the rebalancing that keeps a portfolio aligned with its target.
Framework Coverage
9
Allocation concepts explained below
Structure before selection
Most of a portfolio's long-term behavior is determined by how it is structured — the split between equities and fixed income, the balance between core and satellite holdings, and how consistently it is rebalanced — well before any individual security is chosen. The frameworks below are the building blocks EquityFund uses when discussing that structure.
Modern Portfolio Theory
The mathematical basis for combining assets to manage risk relative to expected return.
Modern Portfolio Theory frames investing as a trade-off between expected return and volatility. Rather than evaluating each holding in isolation, it considers how assets move relative to one another, since combining imperfectly correlated assets can reduce a portfolio's overall volatility without necessarily reducing its expected return.
Core Idea
Diversify to manage risk, not just to hold more assets
Key Measure
Correlation between asset returns
Limitation
Correlations can shift during periods of market stress
Core-Satellite Strategy
A structural split between a stable core and smaller, more targeted positions.
A core-satellite approach anchors a portfolio with broad, diversified holdings — the "core" — and supplements it with smaller "satellite" positions intended to express a specific view or capture a targeted exposure. The core is typically low-cost and broadly diversified; satellites are sized so that, even if one underperforms, the impact on the overall portfolio remains contained.
Core holdings
Broad,
diversified exposure
Satellite positions
Targeted,
higher-conviction exposure
Indexation
Using broad market-tracking exposure as a structural building block.
Indexation refers to holding a broad basket of securities designed to track a market segment rather than attempting to select individual outperformers. It is often used as the foundation of a core allocation because of its low relative cost and broad diversification, though it does not eliminate market risk — an index-tracking holding still moves with its underlying market.
Equity Allocation
Equities generally carry higher expected volatility with a longer growth horizon. Equity weighting is typically higher in portfolios with longer time horizons and greater tolerance for short-term fluctuation.
Fixed-Income Allocation
Fixed income is often used to dampen overall portfolio volatility and provide a more predictable income stream, generally at the cost of lower long-term expected growth relative to equities.
Diversification
Spreading exposure to manage concentration risk.
Diversification distributes exposure across sectors, geographies, company sizes and asset classes so that a portfolio is not disproportionately affected by any single holding or event. It reduces concentration risk but does not eliminate market-wide risk — a broadly diversified portfolio can still decline during a broad market downturn.
Strategic Allocation
A long-term target allocation set according to an investor's objective, horizon and risk tolerance, intended to remain stable through market cycles.
Tactical Allocation
Shorter-term, bounded adjustments around the strategic allocation, made within a defined range rather than as an open-ended departure from it.
Rebalancing
Restoring a portfolio to its target allocation as markets drift.
Example tolerance
±5%
As markets move, a portfolio's actual allocation drifts away from its target — strong equity performance, for example, can push equity weighting above its intended level.
Rebalancing brings the portfolio back toward target, either on a fixed schedule or once a drift tolerance such as five percentage points is crossed.
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