MANAGNG RISK

Understanding and managing risk is a crucial aspect when developing and maintaining an investment portfolio. Each investor has unique circumstances that affect his or her personal risk tolerance. Estate Counselors, LLC tailors investment portfolios to each client's specific level of risk tolerance.

Risk tolerance refers to an investor's willingness to accept the possibility of decline in his or her portfolio's value in order to create the potential for higher returns. In short, the higher a portfolio's expected rate of return, the greater the potential for a decline in the portfolio's value.

Estate Counselors, LLC utilizes a comprehensive questionnaire that is designed to measure a client's investment objectives, investment time horizon, and cash flow needs, both now and in the future. Based on their level of risk tolerance, investors can be divided into five categories: conservative investors, moderately conservative investors, moderate investors, growth investors, and aggressive investors. Once an investor's specific level of risk tolerance has been determined, a model portfolio is constructed that is consistent with that level of risk.

Diversification and asset allocation are important strategies that reduce portfolio risk. As an investor becomes more tolerant of investment risk, his or her portfolio will tend to include more investments in corporate bonds, stocks of large, mid-sized, and small companies, and real estate and commodities. While these types of investments generally produce superior returns over the long-term, they also tend to be more volatile in the short-term than conservative, stable investments.

Stock option contracts can also be used to lessen portfolio risk. A stock option is a right to buy or sell stock (or ETF shares) at a guaranteed price on or before the "expiration date" specified in the option contract. There are two types of stock options. "Puts" give the holder the right to sell stock at a strike price on or before the expiration date, while "calls" give the holder the right to buy the stock at the strike price on or before the expiration date.

A collar consists of one "long" (purchased) put and one "written" (sold) call on the same underlying stock. The primary reason for utilizing a collar is to protect the current value of a portfolio from sharp declines. If the premium received from writing the call equals the cost of the put, the investor is obtaining downside protection with little out of pocket cost. For those clients who are interested, Estate Counselors, LLC has the ability to use combinations of put and call stock options to limit the risk of a sudden and unanticipated decline in equity prices.