INVESTMENT STRATEGY

Modern Portfolio Theory
In building their investment portfolios, most investors pursue one or more of the following investment strategies:
  • They select individual stocks based on their own research, advice from a stockbroker, or on a tip from a friend.
  • They choose mutual funds based on their recent past performance.
  • They rely on recommendations of popular investment journals such as Forbes, Money, and The Wall Street Journal.
  • They rely on the opinions of "market gurus" who publish newsletters or appear on television investment programs.

Unfortunately for investors who rely on these strategies, academic studies have demonstrated that they lead to higher risk, higher fees, and poor performance.

Modern Portfolio Theory, which was originally formulated by Nobel Prize winning academics at the University of Chicago in the 1950's, holds that a portfolio diversified among various asset classes can produce higher returns for a particular level of total risk than a portfolio that is concentrated in one or more asset classes. The amount an individual investor should allocate to various asset classes should be tied to his or her individual risk assessment, income needs, and investment horizon, rather than to an advisor's market predictions, forecasts, and personal preferences.

Estate Counselors, LLC utilizes Modern Portfolio Theory when designing model portfolios for each of our clients. We develop a target or "model" portfolio that is tailored to each personal client's objectives, taking into consideration his or her financial goals, time horizon, and risk tolerance, as well as any other investment restrictions imposed by the client. Client accounts are then individually reviewed on a monthly or quarterly basis, at which time the portfolio's current holdings are compared to the client's targeted allocations. If the client's current holdings deviate from the target allocations by more than predetermined acceptable limits, the portfolio is rebalanced by selling holdings that are over-weighted, and buying more of holdings that are under-weighted.