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?