Revisiting the CORE and EXPLORE strategy

Many experts agree that one of the keys to investment success is to have an investment plan or framework to investing.  I’ve often said investing is a science because it starts with a framework or a disciplined process.

If you research the phrase “CORE and EXPLORE”, you will find many different approaches to the strategy.  Generally, core and explore is an investment strategy where you take the bulk of your portfolio and invest it into something called CORE holdings.  The remainder of the portfolio can then be used to explore into less stable or riskier holdings.

What is a CORE holding?

The definition of a core holding is really subjective.  The term can mean different things to different people.  A CORE holding for one person may not be a core holding for another.  Let’s take a look at some of the different perspectives of what a core holding might be.

  • The most common definition for the term core holding around the web is “A very broad definition of a core holding is an investment that held for a very long time in a portfolio because it is considered a high quality investment with a proven track record.”
  • In many aspects, a core holding is the anchor that provides a sense of stability and direction for portfolios.
  • Another common held characteristic of a core holding is that it provides broad exposure to a number of different investments.  For example, a balanced mutual fund is often considered a core holding because of its broad exposure to different asset classes.
  • Sometimes the term ‘broad mandate funds’ is used in the mutual fund industry to describe a core holding because it does not restrict the manager to a specific region, asset class or sector.  The manager had a broad opportunity for investing.
  • Some consider an index fund or investment a core holding because it has broad exposure to different sectors of the stock market.
  • Others do not think a broad holding has to have broad exposure to many investments.  Instead a broad holding might mean one stable blue chip dividend type stock like any of the Canadian banks as an example.
  • More recently, exchange traded funds (ETFs) have become increasingly popular core holdings because they are low cost passive investments with broad exposure.  Keep in mind, that ETFs have come a long way in a short period of time so not all ETFs have broad exposure.
  • Core holdings are often associated with stable consistent investments that tend to be less risky.  As a result, fixed income investments can often be considered core holdings because of their conservative nature.
  • Typically when it comes to core holdings in a portfolio, investors tend to take larger more significant positions because of their association to quality and consistency.  A core holding is something you are comfortable with so you are willing to allocate a bigger position in the portfolio.

The bottom line is the definition of a CORE holding usually has something to do with quality, consistency, broad exposure, and conservative.

What does it mean to explore?

The whole point of CORE and EXPLORE is that you keep most of your portfolio in core holdings that represents holdings that are more conservative, stable, and represent quality.  On that basis, the rest of the portfolio can be more aggressive to make bets on certain sectors or themes.  Here are some examples of the ‘EXPLORE’ portions of a portfolio.

  • Current trends – sometimes people like to make bets on certain trends in the market or the economy.   Because it is near impossible to accurately and consistently predict the future, making big bets can be very risky so betting with a smaller portion of the portfolio is a little more prudent.
  • Riskier regions like investing in the emerging markets
  • Explore is an opportunity to overweight specific sectors of the stock market like gold, oil and gas, or other commodities.
  • Small cap stocks are often considered riskier investments so they are often not considered core holdings.

Basic, explore would be anything riskier or more speculative in nature.

My two cents.

One of the more common perceptions of core and explore is that core represents passive, low cost index investments while explore represents active management like mutual funds.  I view CORE and EXPLORE as a much broader strategy where it can apply to many different types of investments like mutual funds, individual stocks, ETFs or other investments.  For example, you can have a core and explore strategy with just mutual funds

One of the most common questions I get is how much of your portfolio should go to ‘core’ vs. ‘explore’? Again, there is no universally accepted breakdown but I often like to start with the 80-20 rule.  80% core and 20% explore.

Do you practice CORE and EXPLORE?  How do you define each?

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

11 Responses to Revisiting the CORE and EXPLORE strategy

  1. Echo says:

    My issue with Core and Explore is the people who view “explore” as their play money to gamble on risky penny stocks or the next up-and-coming trend. I’m pretty sure they didn’t view that as play money when they were saving it to begin with.

    As a lower risk strategy (say fixed income is your ‘core’ and adding some blue chip equities is your ‘explore’) I see no problem with the approach.

    • Jim Yih says:

      Thanks for stopping by Echo. And thanks for your opinion. I think a lot of people share your thoughts on CORE and Explore but I also think there are some people that want to gamble and play the penny stocks and as much as that is not me, I think they have the right to do so. My hope is that it is the ‘explore’ part and not the ‘core’ part.

  2. I like the core and explore approach, but I think your idea that it can mean very different things to different people is right on. I’ll probably be using some version of it for our new investment money. The core part of our portfolio will likely consist of a mix of index or sector ETFs and individual dividend-paying stocks. I may look at select small or mid-cap equities for the explore component, but probably not until the core is a decent size.

    Some folks really like to trade penny stocks and I think that’s OK for a small portion of your explore portfolio, so long as you’re actually having some success with it. ;) Having said that, it’s not likely to be a part of our strategy.

    I feel comfortable with this methodology because we already have a significant cash position, and in many ways, I consider that to be the core of our savings.

    • Jim Yih says:

      Thanks for your 2 cents BJ! Personally, I’ve always felt cash and fixed income is part of the perfect core.

      Do you think your ‘NEW’ investment strategy will be implemented at once or gradually introduced?

      • We’ll introduce it gradually and it won’t begin until the mortgage is gone later this year. How quickly we progress will depend on how well we save. We’re going to keep our cash position as a foundation and add other asset classes gradually as we build our savings.

        Thanks for the informative article!

  3. Newbie investor says:

    The Core and Explore approach seems very reasonable and intuitive. I am just starting to invest so my portfolio is still small. The only thing I have in my Explore category is VWO, about 10% of my portfolio (I’m willing to take more risk). My Core would consist of broad index ETF (XIU, VTI, XSB). I’d love to pick individual stocks but I just do not have the expertise to do so.
    I wonder if you can answer a question for me. I have over 10K of cash sitting in both RRSP and TFSA for months, and I am looking to buy more of the ETFs that I already own and add on VEA. Prices are quite high right now, and I wonder whether it’s better to try “timing” the market and wait till prices come down (and park the cash in high interest savings accounts in the meantime) or should I start buying now? I am not trying to rebalance. I am still in the process of building my portfolio to my target asset allocations.

    • Jim Yih says:

      Hey, Thanks Newbie Investor!

      I am not a fan of market timing. I think it’s impossible to predict the future accurately and consistently.

      I think no matter what the market conditions are, there are good investments out there. EFTs are designed for investors who want to take the market timing out of it because they invest in a portfolio of stocks.

      If you are concerned about market valuations, stage your money in instead of all at once to take the guesswork of timing.

      It it were me, I would have put it in at the time and kept some cash on the sidelines just in case.

      I hope that helps!
      Jim

  4. Chris says:

    How safe are broad based ETFs? (i.e, TSX60, S&P 500, etc..). Although the stock market has gone up and down throughout the years, what’s not to say that the index can fully recover? The best example is the nikkei index in the 90s that has never recovered.

  5. As I site owner I believe the content material material here is really superb, thanks for your efforts.

  6. Hello my loved one! I want to say that this post is
    awesome, great written and include approximately all important infos.
    I’d like to peer extra posts like this .

Leave a reply

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Name: Email: