What is the Core and Explore Portfolio?
Part 2: Introducing the portfolio I choose to have, and why I believe it is advantageous.
If you didn’t see part 1 of this series, here it is.
There are a lot of different portfolios an investor can follow. Amongst them all, one stands out to me; the Core and Explore portfolio. This strategy offers a structured yet flexible blueprint for building a diversified portfolio that can work with different financial goals and risk tolerances. It’s as versatile as you want it to be.
The Core: Stability and Diversification
The heart of this strategy is the “core.” This is the foundation of your investment and will represent a significant portion of the portfolio. I suggest 50% as a minimum, but I recommend more. The core will offer stability and long-term growth. It will consist of broad, diversified, low-cost mutual funds or exchange-traded funds (ETFs), and later on, I will share many recommendations and help you understand which is for you. We want to aim for something that will mirror the performance of the global stock market, with a little bit of bias to your home country. For this series, I will be using home bias towards Canada. It represents about 3-4% of the global market cap but will be about 25% - 30% of the core. I will go over the pros of home bias with additional resources later on.
A strong core will give you numerous advantages:
Lower Costs
We will stick to low-cost funds, which have minimal management fees (~0.20%). We will also purchase funds that trade in our currency, so there will be no foreign exchange fees.
Good Returns With Reduced Volatility
We will be holding funds with diversified holdings. We will receive good, stable returns and be less susceptible to market fluctuations due to the free lunch that is diversification. 1
Simplicity
A core portfolio will simplify the investment process. It will be easy to manage and rebalance, as there are numerous 1-fund solutions that we will explore later.
The Explore: Personalization, Growth Potential, and Fun
The ‘explore’ portion of the portfolio will allow you to pick your own investments. This part of your portfolio should be smaller.
Here’s the truth. You’ll hear people say that “investing is solved” and that “people should just buy XEQT, go to sleep, and wake up 30 years later”, and they are correct. However, what they don’t realize is that “going to sleep, and waking up 30 years later” is the hard part. In a traffic jam on a highway, people are tempted to switch lanes, especially if they see the lane next to them moving quicker. However, studies have found that this does not allow you to arrive at your destination any quicker and does increase the chance of an accident.2 People just want to do something.
So, the exploration part of the portfolio comes with its own advantages.
Active Engagement
Personalization
Higher Growth Potential
Balancing the Two
The Core and Explore strategy isn’t just a one-size-fits-all. It needs to be shaped to suit different people, depending on their risk tolerances, time horizons, and how much “exploring” they want to do. For example, younger investors may be willing to take on more risk, as they have a longer time horizon. At the same time, they may have shorter term goals, like buying a car, so how should they structure your portfolio then? This is why, in the upcoming posts, we will go over setting good goals, and having a clear risk tolerance.
This strategy has a clear psychological advantage over others. Investors who want to do something will be able to satisfy this urge, and can help prevent them from exposing themself to too much risk.
The Core and Explore portfolio strategy provides people with a balanced approach that combines the best of both worlds: the stability, good returns, and efficiency of passive core investments, and the personalization and active management with explore selections.
https://youtube.com/watch?v=1FXuMs6YRCY
https://www.nature.com/articles/43360