The Evolution of Investing Is Critical
Along with Education a second and equally important component of Investor Empowerment is investing Research and Development. The world of investing is constantly changing. Markets are becoming significantly more complex and unpredictable. Unfortunately traditional investing methods and investment types that we use today to deal with these new market dynamics have not changed in decades, and they no longer work. The NAOI has created a Research and Development department to address this issue. It's mission is discussed on this page.
The State of Investing Research Today
The state of investing research today is not good. It seems to concentrate on developing new products and methods that increase the profits of the financial industry rather than striving to improve the lot of the investing public. Every traditional investing method used today should be constantly questioned and research efforts made to improve it. With the massive amount of market data and the increasingly powerful investing tools available today bold ideas and sweeping changes to the core of investing should abound. But they don't. The status quo prevails; nothing gets better.
Unfortunately investing research today seems to be limited to be working at the fringes of the investing world. Periodically we hear about new ETF with names like "Japanese Hedged Equity ETF" or "Dynamic Currency Hedged International ETF." Who buys these things? Not the investing public that the NAOI works with. Then there are such "major" research breakthroughs as Robo-Advisors that do little more than automate traditional investing method that are rapidly growing obsolete - the proverbial "lip-stick on a pig" type of development.
No person or organization seems to be questioning the fundamental theories of investing that have been in use for decades and are still used today.
Investing Today is Stuck in the Past!
It may come as a surprise to you to learn that the fundamental principles used today to design investment portfolios were introduced in 1952! Virtually all advisors use an approach called Modern Portfolio Theory (MPT) for this purpose. Its goal is to create portfolios that match an investor's risk tolerance level via asset allocation between primarily stocks and bonds. Then once a portfolio is created it is meant to simply be bought and held for the long term regardless of market conditions. The problem is that this is a "static" approach to investing while markets have become increasingly "dynamic". This mismatch periodically results in portfolio meltdowns as they did during the market crash in 2008. It also results in portfolios leaving a lot of positive returns on the table in uptrending markets. The bottom line is that current investing methods are becoming rapidly obsolete; yet no one seems to care.
Take a look at the chart below that shows the price level of the stock market (as represented by the DOW Industrials index) over the past 100 years. Note on the chart where MPT was introduced and adopted as "settled science" for how to design a portfolio. Then observe how markets have changed since then. Yet investing methods we use to deal with markets have barely changed at all. Is it any wonder that they don't work today?
An Example NAOI Research Project Process - Replacing MPT!
In the Fall of 2008, the NAOI stopped teaching Modern Portfolio Theory (MPT) in its college classes. As the stock market was crashing, the MPT portfolios we were teaching students how to create were crashing just as hard. At that point the NAOI had to admit that traditional investing methods no longer worked in modern markets and set out to find a better approach to portfolio design and investing in general. We found it in Dynamic Investment Theory discussed elsewhere on this site.
NAOI research follows a set of rules regardless of the topic under investigation. Here are the steps we took to find a better approach to investing that could replace Modern Portfolio Theory:
- Step 1: Identify a Problem and Define It - The problem was that MPT portfolios provided the public with mediocre returns, high risk, high expenses and no crash protection. It was also filled with human subjective judgment leaving the process open to bad data, incorrect analysis, biased advisor recommendations and even outright fraud. The NAOI decided that this state of affairs needed to be fixed.
- Step 2: Look for Existing Research - The NAOI looked in various areas of the financial services industry and academia and could find no attempts to either improve or replace MPT. It was seen as "settled science" and not open to question. Understanding that we could not build on existing research we were forced to start from scratch and conduct research for replacing MPT on our own.
- Step 3: Gather Feedback from the Investing Public - The goal of all NAOI research and development is to empower investors. Thus the first step in our research project was to survey hundreds of NAOI members and students asking them what they wanted and needed in a new approach to portfolio design that would give them confidence to invest. We gathered reams of data from people of all ages and investing experience levels.
- Step 4: Set Goals for the Solution of the Problem - Based on input from the public the NAOI defined specific goals that a new approach to investing needed to meet. This was our blueprint for all further research and development.
- Step 5: Propose Tentative Solutions and Extensively Test Each- The NAOI team proposed and considered multiple new portfolio design approaches and backtested each extensively to find one that met the goals of the research project.
- Step 6: Identify the "Best" Proposed Solution - The NAOI worked with multiple "outside the box" investing approaches and through a process of testing, revision and retesting identified one that met the projects goals. We called it Dynamic Investment Theory.
- Step 7: Document the Solution in Detail and Establish Standardized Rules for Implementing and Managing It. The NAOI documented in detail all aspects of Dynamic Investment Theory (DIT for short) and created a standardized set of rules of implementing and managing the Dynamic Investments that it created.
- Step 8: Communicate the Newly Developed Product or Service to the World. The NAOI Research Department worked with the NAOI Education Department to create a Book / Study Course that communicated to the world why DIT was needed, how and why it works and how to implement the Dynamic Investments and Portfolios it creates. This is "The Amazing Future of Investing" book that is described in the NAOI Store on this site.
All NAOI Research and Development efforts follow this same structured process and it works exceedingly well. At any one time the NAOI Research Division has multiple projects on the table at vary stages of development. There is no shortage of investing areas that need to be completely revised or replaced with better methods.
The Goal of the NAOI Research and Development Department
The NAOI R&D Department's goal is to identify current investing concepts, methods and products that are dangerously outdated and to develop new ones that work in today's markets. While the development of an alternative to Modern Portfolio Theory is perhaps the most sweeping innovation that the NAOI Investing R&D has made to date, it is only one example of the wide range of research projects the division is currently working on. And some of them will surprise and amaze you. We are working to change things that people have been taught by the financial establishment are "settled science." They are not.
It is important to understand that the NAOI works for the benefit of the investing public and is completely independent of any financial services organization. Thus, we are not constrained by traditional investing methods that are seen today as not open to question. As was the case with Modern Portfolio Theory, the NAOI does not shy away from questioning even the most ingrained methods used by the financial establishment today.
Investing Must Evolve!
To survive, the world of investing must evolve to meet the demands of its customers, something that it is not currently doing. In today's investing environment all of the power rests with the financial establishment. They dictate the investing methods that are used because the public is not able to challenge them. People passively buy what the experts recommend because they have no capacity to analyze and question them. Traditional investing methods serve as the foundation for a very profitable business model that financial vendors have no incentive to change.
But this business model is not working well for individual investors who are growing increasing dissatisfied with low returns, high risk, excessive expenses and in general how their money is managed. This frustration will turn into action when individual investors are empowered through education and innovative methods to make better investing decisions on their own. At that point working with an advisor will become optional and the financial industry will be forced to change to meet the demands of their customers or their clients will have options. The NAOI is working to give the public this power of choice.
When the public is empowered, and they will be in the very near future, organizations that embrace change will survive and continue to profit. Those that are stuck in the mire of old ways of thinking will go the way of the dinosaurs.
The NAOI is dedicated to restarting the evolution of investing to cope with the dynamics of today's markets. It is time to throw out the old and bring in the new. If you or your organization are of the same mind, we invite you to work with us by becoming an NAOI Research Partner - click the link to learn more. And be sure to sign up for the Updates Alert Email List at the bottom of any page on this site to stay abreast of all new NAOI R&D developments!