======Hub-and-Spoke Model======
The Hub-and-Spoke Model (also known as 'Core-Satellite Investing') is a popular and intuitive method for structuring an investment [[portfolio]]. Imagine a bicycle wheel or an airline’s flight map. There's a strong, central hub that connects to numerous smaller spokes. In investing, the 'hub' represents the core of your holdings—typically a large, stable, and diversified foundation. This is your portfolio's anchor. The 'spokes' are smaller, more specialized, and potentially riskier investments that radiate from the core. This structure provides a disciplined framework for [[asset allocation]], blending the stability of passive, long-term investing with the potential for higher returns from more active, opportunistic bets. For a [[value investing]] practitioner, it offers the best of both worlds: a solid base built on well-researched, durable companies, complemented by smaller positions in special situations or deep-value finds, all without betting the farm.
===== How the Hub-and-Spoke Model Works =====
The beauty of this model lies in its simplicity. You decide what percentage of your capital goes into the stable hub versus the more adventurous spokes. A common split is 80% in the hub and 20% distributed among the spokes, but this can be adjusted based on your risk tolerance and confidence.
==== The 'Hub': Your Portfolio's Anchor ====
The hub is the engine room of your long-term wealth creation. It should be built to last and require minimal tinkering. Its primary job is to capture the broad market's growth steadily and reliably. Think of it as your financial bedrock.
Characteristics of a strong hub include:
  * **Size:** It should represent the vast majority of your portfolio, typically 60% to 90%.
  * **Diversification:** It should be spread across many companies, sectors, and even geographies to smooth out volatility.
  * **Low Cost:** High fees are a drag on long-term returns. The hub should be as cost-efficient as possible.
Common hub investments include:
  * **Low-Cost [[Index Fund]]s or [[ETF]]s:** A fund tracking a major index like the S&P 500 is the most popular choice. It's diversification in a can.
  * **Diversified [[Mutual Fund]]s:** Actively managed funds can also serve as a hub, provided you have high conviction in the manager's strategy and the fees are reasonable.
  * **A Basket of [[Blue-Chip Stocks]]:** A hands-on [[value investor]] might build their own hub with a collection of high-quality, wide-moat businesses purchased with a significant [[margin of safety]].
==== The 'Spokes': Chasing Opportunities ====
The spokes are where you can express your unique investment ideas and take calculated risks. These are smaller, concentrated bets designed to //outperform// the hub. Each spoke is a separate, independent idea, and because each position is small, a failure in one won't cripple your entire portfolio.
Spoke investments can be anything that aligns with your research and goals:
  * **Individual Stocks:** A promising tech company, an undervalued industrial firm, or a deep-dive into [[small-cap stocks]].
  * **Thematic Investments:** Concentrated bets on specific trends like renewable energy, artificial intelligence, or water scarcity.
  * **Other Asset Classes:** This could include specific corporate [[bonds]], real estate (REITs), or even commodities if you have a strong thesis.
===== A Value Investor's Perspective =====
The hub-and-spoke model aligns perfectly with a value investor's patient yet opportunistic mindset. It provides a structure to emulate the strategies of the greats.
==== Building a Value-Oriented Hub ====
For a value investor, the hub may not be a simple index fund. Instead, it could be a concentrated portfolio of what Warren Buffett calls "wonderful companies at fair prices." This is a collection of businesses with durable [[economic moat]]s, predictable earnings, and shareholder-friendly management, much like the core holdings of [[Berkshire Hathaway]]. The goal is not just to match the market but to build a fortress of superior businesses that will compound wealth for decades.
==== Using Spokes for Special Situations ====
The spokes are perfect for applying the more opportunistic side of value investing, as taught by pioneers like [[Benjamin Graham]]. This is where you hunt for treasure in less-obvious places.
A value-focused spoke might be:
  * **A 'Cigar-Butt' Stock:** A statistically cheap, unloved company with one last puff of profit left in it.
  * **A [[Turnaround]] Story:** A once-great company that has fallen on hard times but shows credible signs of recovery.
  * **A [[Spin-off]]:** A corporate event where a part of a company is separated, often creating a temporarily misunderstood and undervalued entity, a strategy favored by investors like [[Joel Greenblatt]].
Each spoke must be analyzed with the same discipline as a hub investment, but their smaller size allows you to invest in situations with a wider range of outcomes.
===== Pros and Cons =====
==== The Bright Side (Pros) ====
  * **Simplicity and Discipline:** Provides a clear, easy-to-understand structure that prevents emotional tinkering with your core assets.
  * **Blended Approach:** Combines the low-cost benefits of passive indexing with the potential upside of active stock-picking.
  * **Risk Management:** It quarantines risk. A speculative spoke that goes to zero is a small, manageable loss, not a catastrophe.
  * **Psychological Buffer:** It allows you to "scratch the itch" to trade or chase exciting ideas without derailing your long-term financial plan.
==== The Potential Pitfalls (Cons) ====
  * **"Diworsification":** If not chosen carefully, your spokes might just add complexity and trading costs without improving your [[risk-adjusted return]]. This is the trap Peter Lynch famously called [[diworsification]].
  * **The Temptation to Tinker:** The excitement of the spokes can lead to over-trading, racking up fees and taxes that eat away at your gains.
  * **Hub Neglect:** An investor might become so focused on finding the next big winner in their spokes that they neglect to rebalance or review their hub, which is the true driver of their long-term success.