The Future of Investing Revealed:
The Rise of Dynamic Investments
and Market-Sensitive Portfolios
In the first quarter of 2018 the National Association of Online Investors (NAOI) will change the world of investing at a fundamental level. We will issue a Press Release that reports the results of a 5+ year NAOI study into the way investing works today for the individual investor and how it can be improved. Our findings, conclusions and recommendations will stun the financial world. They reveal a new investment approach that the NAOI calls Dynamic Investment Theory (DIT) and the revolutionary investment type called Dynamic Investments (DIs). These are simple investments that produce returns that today's portfolios can't touch with less risk and no active management involved.
The purpose of this Web page is to provide to the financial media a "first look" at this new approach to investing prior to our Press Release. We are confident that this topic will be of intense interest to both individual investors and to the financial services industry alike. NAOI members and students who have worked with Dynamic Investments for several years now tell us, without reservation, that this is the future of investing. This is what they have been waiting for to finally enter the world of investing with confidence and without fear.
By Invitation Only
Allow me to introduce myself as Leland B. Hevner, President of the NAOI. I have created this DIT overview page specifically for viewing by my LinkedIn media contacts who I believe are best positioned to report this information to the financial world. The page you are reading is not listed in the navigation menu of this site. It can only be reached by typing in its URL. You are here because I have invited you via a personal LinkedIn message.
If you find this information interesting, contact me via LinkedIn messaging or by using the information shown on the CONTACT page of this site to obtain more information and discuss the potential for an interview. At a minimum, consider joining the NAOI Updates email list via the signup form at the bottom of this page. By doing so you will be alerted when major new developments are released by the NAOI. This is NOT a marketing list and your information will be secure and private.
On this page I summarize how the NAOI sees the future of investing unfolding and it is amazing. The full story and detailed description of Dynamic Investment Theory and the Dynamic Investments that the theory produces are told in "The Amazing Future of Investing" book discussed below on this page.
About the NAOI and the Study
Founded in 1997, the NAOI is the market's premier supplier of objective and comprehensive investor education to the public. Via our online courses, college classes, published books and media articles we have taught thousands of individuals the art and science of investing. You can learn more about us by clicking here.
When the stock market crashed in 2008 and portfolios designed based on traditional Modern Portfolio Theory (MPT) methods crashed along with it, I stopped all future classes, I realized that I was doing my students no favors teaching portfolio creation based on a theory introduced to the market in 1952! While markets have changed significantly since then, MPT has barely changed at all and the "static" portfolios it creates simply cannot cope with modern dynamic markets. More than education was needed to empower investors, also needed was innovation. Thus, I refocused NAOI resources from education to research.
Starting with Investor Wants and Needs
We started our research efforts by first examining in detail today's investor experience. Our goal was to learn what the average person with money to invest needs and wants to enter the market with confidence. Fortunately we have access to hundreds of NAOI members who are the target market. Via interviews and surveys they told us that they wanted the following major improvements:
- A less complex world of investing - e.g. simplify!
- Higher investing returns in all economic conditions with less risk
- The ability to take more personal control of their financial future - e.g. less dependence on financial advisors
- Absolute protection from market crashes such as the one they experienced in 2008
- Absolute protection from investor abuse - e.g. scams, fraud, churning, sales bias, bad advice
We quickly realized that we could not meet these goals using MPT methods. So we started our research with a blank slate. We would not be constrained by traditional methods in universal in universal use today.
Our Methodology, Findings and Mission
Our search for a new approach included extensive interviews with the investing public, an intense study of the catalysts that move market prices, a deep dive into historical market performance as it relates to economic conditions and an wide-ranging exploration into how the financial world advises individuals to invest today. We also looked closely at investing research projects in progress today at a variety of financial organizations.
As input poured in and was analyzed by the NAOI, two aspects as problematic in how invest today stood out. First, the universal standard for portfolio design today is Modern Portfolio theory (MPT). This is a design methodology first introduced in 1952. Yet as markets have evolved significantly since then MPT methods have barely changes at all. As a result, the public is still given static, buy-and-hold portfolios in today's dynamic markets and they are incapable of either taking full advantage of market uptrends or of protecting investors from downtrends and crashes such as the one we saw in 2008.
Second, we saw that there was very little scientific method used in the formulation of investing advice given to the public today. It is virtually all based on the subjective judgments of financial "experts" - what we can only describe as informed guesses. There are two problems with this. It makes individual investors dependent on advisors, who are also sales people, to tell them what and when to trade. And it opens the doors to bad data, incorrect analysis, sales bias and even fraud and scams. We found that today's investing environment leaves individuals wide open to investor abuse.
These are two of the many areas of investing today that needed to be corrected in a new approach to investing. Changing how investing works at a fundamental level became our mission.
The Discovery and Development of Dynamic Investment
After multiple years of research, testing and development we found the new approach needed. It met all of the requirements given to us by the public as listed above and more. We call it Dynamic Investment Theory. It sets the logic and methods for the creation of a revolutionary investment type called Dynamic Investments that are capable of not only coping with modern markets but thriving in them.
Introducing Dynamic Investment Theory
We started our development process with the only things we know about market price movements with a high degree of certainty. One would think we know a lot. We don't. Following is the complete list:
- Market prices are cyclical - they move up and down on a periodic basis
- Different assets, markets and market segments move up and down at different times - e.g. when stocks move down, bonds tend to move up
That's it. But it was enough to enable us to formulate and develop the new investment theory that we needed to meet our mission. From these two observable elements of market dynamics we created the premise that at all times and in all economic conditions there exist positive returns potential somewhere in the market. Our goal then became to develop a new investment type that could find and capture this positive returns potential.
Our next step was to create a theory that would provide a logical basis for creating such investments. We did so and called it Dynamic Investment Theory or DIT for short. DIT creates Dynamic Investments, DIs for short, that are designed to find and capture the positive returns that exist in the market at all times in any economic condition. And to do so with minimal risk and no active management required.
Introducing Dynamic Investments - A Cheat Sheet
DIT guided our design of Dynamic Investments, a revolutionary investment type that meets the goals of the individual investor. The DI structure and components are shown in the diagram below.
Powered by Exchange Traded Funds (ETFs), Dynamic Investments (DIs) are the market's first comprehensive investing "product". They not only specify the ETFs to work with but how they are to be managed on an ongoing basis. These are buy-and-hold investments that automatically change the ETF they hold based on a periodic sampling of market trends. In essence, they are active investments that are passively managed. DIs represent a huge leap forward in the evolution of investing. The components of all DIs are:
- Dynamic ETF Pool (DEP) - Dynamic Investments hold groups of Exchange Traded Funds (ETFs) in a DEP. Defined by a DI Designer, the ETFs in the DEP specify the areas of the market where the DI will search for positive returns. These ETFs are simply "candidates" for purchase. Only one of them is bought and held at any one time as determined by the ETF Selection Module that contains the components described next.
- Review Period - The ETFs in the DEP are periodically ranked to determine which is trending up most strongly at a predefined Review Period. The "winner" is the one that is bought and held until the next Review Period. A typical Review Period is monthly or quarterly as defined by the DI Designer.
- Trend Indicator - This is the price chart indicator that is used to rank the ETFs in the DEP at Review Time. It can be as simple as the past 90 day returns. In which case the one ETF in the DEP with the highest returns for that period is bought and held until the next Review.
In the NAOI book entitled The Amazing Future of Investing, we suggest a Review Period and a Trend Indicator that our testing has shown work very well. This enables DI Designers to focus on finding an optimal mix of ETFs for the DEP. We also provide several well tested DEPs in the book.
Theories are a dime a dozen. It is performance that counts. Do Dynamic Investments work? Extensive NAOI testing across multiple market and economic conditions showed us that they do work and amazingly well.
As just one example, the simplest DI designed by the NAOI has just two ETF types in its DEP - one for Stocks and one for Bonds. We call this the NAOI Core DI. It automatically rotates between these ETFs based on a quarterly sampling of the price trends of each.
The Core DI produced the returns shown in the top row of the table below along with its Average Annual Returns for the period and its Sharpe Ratio which is a measure of how much return is produced for each unit of risk taken; the higher the better. For comparison purposes I have shown in the bottom two rows the performance of a traditional MPT portfolio with the allocations shown and the performance of SPY, an Exchange Traded Fund that tracks the S&P Stock Index.
You can see that the Core DI performance is nothing short of amazing. And this performance was achieved with minimal risk and no active management required
How is this possible? There are multiple reasons but chief among them is that the DI is dynamic; able to automatically and rapidly change its ETF holding to take advantage of current economic and market conditions. The "static" MPT portfolio simply held both asset types (Stocks and Bonds) throughout the period and assuring that it held at least some losing investments at all times. This is 1950's era thinking. DIs bring the world of investing into the 21st Century by striving to hold ONLY winning investments.
The Introduction of Time-Diversity - a Game Changer
Dynamic Investments introduce to the world of investing a new diversity element that we call "time-diversity." While the company and asset diversity employed by both MPT and DIT portfolios only reduce risk, time-diversity reduces risk AND increases returns. This is why DIs can consistently produce performance like that shown in the above table where you can see that the Core DI earned close to 5 times the returns of the MPT portfolio with approximately 3 times less risk!! MPT says this is not possible, that higher returns ONLY come with higher risk. DIT says this is nonsense.
The NAOI Core DI is just one of an unlimited number of DIs that can be created. In The Amazing Future of Investing book, discussed below, we show the design of several more DIs that produce returns even better than the Core. And we show potential DI Developers how to create a full product line of other DIs for a variety of investing goals.
The introduction of DIT methods and the DI investment type will effect virtually every area of the financial services industry. Below are just a few of these areas and a link to how they will improve to better meet the needs of both buyers and vendors. Links lead to areas on an NAOI site dedicated to DIT at www.DITheory.com.
- ETF Creators and Vendors (go to page)
- Portfolio Designers and Mangers (go to page)
- ETF Product Researchers (go to page)
- Dynamic Investment Designers (go to page)
- Financial Advisors (go to page)
- Index Creators (go to page)
- 401k Plan Users and Providers (go to page)
- Discount Brokers (go to page)
- Academia (go to page)
DIT and DIs do not a "tweak" to the way we invest today they change investing at a fundamental level. This new approach meets ALL of the goals set for the NAOI at the beginning of our study. And it ushers in a new / better era of investing for both individual investors and for the financial services industry.
The Book: "The Amazing Future of Investing"
Dynamic Investment Theory and Dynamic Investments are fully explained and discussed in The Amazing Future of Investing, a new book published by the NAOI. The book also shows readers how to design, create, implement and manage DIs that can be easily used today such as the Core DI discussed above. The book cover and Table of Contents are shown below.
This book is essential reading for organizations in the financial services industry. In these pages they will learn how to use Dynamic Investments to expand their product base, open significant new revenue sources, capture a massive new market share and gain a major competitive advantage in a crowded marketplace.
The book is also be essential reading for individual investors who want higher returns with less risk from their portfolios. DIT is simple and investors of all experience will be able to easily implement and manage the DIs that are described in the book immediately upon completion. DIT and DIs meet every goal that the public set for us when we began our study for a new approach to investing.
The book can be purchased via this site at this page.
Format: 8.5" x 11.0", ring-bound for easy "lay-flat" study
Publish Date: December, 2017
Publisher: National Association of Online Investors, Tampa, FL
A Gold Mine for the Financial News Media
Dynamic Investing methods and Dynamic Investments will change the fundamental way we invest and define the future of investing. How and why this happens will be of intense interest to both individual investors and financial pros alike. Following are several bullet points that illustrate why.
- Performance - Even the simplest, most basic Dynamic Investment created and tested by the NAOI earned an astonishing 30%+ average annual return for the past decade. And our testing data shows that this is not an aberration.
- Simplicity - Dynamic Investments are so simple to understand, implement and manage that investors of virtually all experience levels will be able to take advantage of them today. Simplicity and consistent performance over the long-term are requirements to ensure the staying power of this new approach to investing.
- The New Standard Portfolio Building Block - Today the main portfolio building blocks are mutual funds and, increasingly, Exchange Traded Funds (ETFs). In the future of investing, Dynamic Investments will play this role with far superior results.
- The Productization of Investing - Each DI is a comprehensive investment, specifying not only which ETFs to work with but how they will be bought, sold and managed on an ongoing basis. Once created, DIs don't change so they can purchased by investors "off-the-shelf" from a variety of vendors. Investors then simply buy and hold them, confident in the knowledge that their DI will automatically signal the trades needed to take advantage of current market conditions. DIs are an active investment that is passively managed and the very definition of a "consumer investment product". DIs represent a huge leap forward in the evolution of investing.
- A Superior Retirement Plan Default Investment - The NAOI Basic DI will soon be the most popular default investment in the 401(k) and retirement plan market. When widely marketed, Dynamic Investments will dwarf the use of any other default retirement investment type such as target-date funds or life-strategy funds. (Click here for more information on this application.)
- Finally Make ETFs Mainstream Investments - MPT portfolios embrace a buy-and-hold management strategy. As a result they do not exploit the unique benefits of Exchange Traded Funds. DIT embraces a buy-and-sell strategy and takes full advantage of ETF unique capabilities. As a result, the introduction and use of Dynamic Investments will cause ETF sales to explode! (Click here for more on this topic.)
- And so much more - Go to The Future of Investing page on this site for a more extensive list of how investing will evolve with the introduction of a new fundamental approach to investing in the form of Dynamic Investment Theory.
Robo-advisors, Intelligent Portfolios, Smart Beta Funds - all touted as the future of investing today - may make for interesting reading but they do little more than "tweek" the way we invest today. Why? Because they still assume the use of outdated, static MPT methods. At the NAOI we see such products as "sideways" developments at best.
DIT and Dynamic Investments represent the first true "forward" development in the evolution of investing in decades. Media organizations who explore this terrain first and report on it will gain a vast audience of new readers/listeners - individual and professional investors alike - who are looking for "outside-the-box" ways of thinking and a fundamentally better way to invest.
DIT is not a "tremor" in the world of investing, it is a full blown "earthquake" and as such, makes for compelling reportage.
For more information and/or to schedule an interview related to the information on this page, contact Leland Hevner either via his LinkedIn Profile or directly via Email at LHevner@naoi.org. Exclusive rights to report on this major development in the world of investing will be available for a limited time.