This page addresses a major problem investing today, namely the fact that employees are not taking full advantage of the 401k plans their companies offer. These plans are where most individuals interact with the market. Yet the investing options that plan participants are given are often substandard and burdened with excessive fees. Plus education for participants is "missing in action." On this page the NAOI shows how Dynamic Investments are the solution to 401(k) problems. 

401(k) Plan Problems

The NAOI has worked with hundreds of individuals who are eligible to enroll in a 401k program provided by their employers. Following are just a few of the problems that they tell us they face.

  1. Substandard Education - Participants are generally not happy with the investing "education" they receive. Most are simply advised to buy an asset-allocation portfolio holding a stock mutual fund and a bond mutual fund and to decrease their exposure to stocks as they near retirement age. This is old-school thinking. We live in an era where bonds can be just as, or more risky than stocks. This type of substandard education offered by 401k plan providers today results in too many participants holding low performance, high risk portfolios. Yet this devastatingly bad "education" continues without question.
  2. High Expenses - There are all types of hidden expenses attached to mutual funds offered in 401k plans and participants are not taught how to find and evaluate them. Using Exchange Traded Funds (ETFs) will go a long way toward solving this problem.
  3. A Buy and Hold Strategy - 401(k) plans offer no automatic "triggers" that will get participants out of markets or asset types that are crashing. We saw the results of this problem in 2008 when the stock market crashed and people lost up to half of their portfolio value. Again, present day 401k plan providers show no inclination to teach participants how to place simple stop losses that would alleviate this problem.
  4. No Good "Default" Investment - An effective 401(k) plan offers a good "default" investment - one that is simple, conservative and works for everyone, even the most inexperienced investor. In the recent past the 401(k) industry thought they had a default investment in the form of "Target Funds." These funds (or ETFs) automatically shift money from stocks to bonds as the holder nears retirement age. Well, this didn't work. A significant number Target Funds and ETFs have been pulled from the market because they are based on outdated MPT concepts and their performance is embarrassing to both buyers and sellers.

The 401(k) provider industry needs to step up its game and start offering better plans. And company HR departments need to start demanding better. Fortunately dramatically improving 401(k) plans is not hard. The solution lies in using NAOI Dynamic Investments and Portfolios as explained below.

The NAOI Dynamic 401(k) Portfolio

Hopefully you have read about Dynamic Investments on this site. If so, you know that this unique investment type periodically (e.g. quarterly) and automatically samples the market and adjusts its holdings in response to trends. There are many ways to incorporate Dynamic Investments into a 401k plan. Let's take a look at one simple example.

A Simple 401k Dynamic Portfolio Design

Designing a high-performing, low-risk Dynamic Portfolio is extremely easy. For this example we will simply use Mutual Funds or ETFs that represent the total stock market and the total bond market. Part of the portfolio will use a buy-and-hold strategy and part will be dynamic, moving to stocks or bonds in response to current market conditions. Below are sample allocations for our Simple 401k Dynamic Portfolio which are also illustrated on the pie chart at right:

  • 25% Total stock market Mutual Fund or ETF (buy and hold)
  • 25% Total bond market Mutual Fund or ETF (buy and hold)
  • 50% NAOI Dynamic Investment - (rotates between stocks and bonds based on a periodic review of market conditions)

This is as simple as it gets. In fact, in its most basic form the only investments needed here are 2 Exchange Traded Funds - one for the total stock market and one for the total bond market. 

Uptrending Stock Market

The Dynamic Investment will periodically (e.g. quarterly) and automatically test both the stock and bond market. It will purchase the Mutual Fund or ETF that is showing the strongest uptrend at time of review.

The pie chart at right shows the asset allocation of the Dynamic Portfolio in a market where stocks are trending up. Here the Dynamic Investment has purchased the stock-related investment with 50% of the portfolio's money. This, added to the 25% static stock investment, makes the total exposure to stocks 75% while exposure to bonds remains at 25%.

Down-Trending Stock Market

When the stock market is trending down, the bond market should be trending up. If the Dynamic Investment's quarterly review shows that bonds are moving up more strongly than stocks, it will buy the bond-related investment and hold it until the next review.

The pie chart at right shows the total portfolio allocation in a down-trending stock market. Here the portfolio holds 75% bonds and 25% stocks. The bond allocation is the sum of the Dynamic Investment's holding and the buy and hold bond segment of the portfolio.

A New Portfolio Type and a 401(k) Default Investment

So, what do we have here? Is this a "buy and hold" portfolio or is it an "active management" portfolio. The answer is that it is the best of both types. This is a "dynamic" portfolio that changes its allocation between stocks and bonds based on current market conditions. But, and this is important, there is no human judgment involved here. The portfolio automatically changes allocations based on empirical data collected during periodic reviews. This is a new type of dynamic portfolio is the perfect default investment for 401(k) plans! In fact, its a no-brainer.

The NAOI Dynamic 401(k) Portfolio Performance

Now let's look at how such a Dynamic Portfolio would have performed during the period from 2007 to 2014. The table below shows the Dynamic Portfolio's performance on the top line. For comparison purposes, the second and third lines show the performance for two traditional, buy-and-hold portfolios with different allocations. The bottom row shows the performance of the stock market as measured by the S&P 500 index for the period. Below the table each data element is explained in more detail.

all numbers are percentages except the final column

all numbers are percentages except the final column

Shown in the table are the following:

  1. Portfolio  - In the first column are the portfolios tested. The top row is the Dynamic Portfolio described above with 50% allocation to a simple Dynamic Investment and 25% allocation to a Total Stock Market Fund/ETF and a Total Bond Market Fund/ETF. Rows 2 and 3 are traditional MPT portfolios with the allocations shown. The bottom row is the S&P 500 stock market index.
  2. Yearly Returns - For each portfolio the backtested yearly returns are shown for the period from 2007 to 2014 assuming no money is taken out of the portfolio and all interest and dividends are reinvested.
  3. Avg. / Yr. - This column shows the average annual return produced by each portfolio or index during the test period.
  4. Sharpe Ratio - This is a statistical measure of how much return was produced for each unit of risk taken. Investments with Sharpe Ratios greater than 1.0 are considered to be superior investments.
  5. Growth of $10,000 - The final column shows the growth of $10,000 invested at the beginning of 2007 and measured at the end of 2014 for each portfolio or index. It assumes that all earnings are reinvested.

Why the NAOI Dynamic Portfolio is the Perfect 401(k) Investment

The Dynamic Portfolio (DP) approach works for any area of investing but it works especially well in the 401(k) environment for these reasons:

  1. Automatic Market Sensitivity - The DP automatically adjusts its holding(s) based on market trends. It buys the ETF that is moving up most strongly on a quarterly basis. There are no human judgments involved to screw things up! All changes are made based on empirical market observations. There is no room here for bad data, poor decisions, emotional reactions or commission biased recommendations.
  2. Minimal Education Needed - Since this investment is so simple to understand and all trades are automatic, the holder of the Dynamic Portfolio does not need the level of training needed today to build asset allocation portfolios and the try to manage them in an optimal manner. The 401(k) participant simply buys and holds an NAOI Dynamic Portfolio with the confidence that it will make periodic adjustments far more effectively and efficiently than a human advisor.
  3. High Performance - The results of the Dynamic Portfolio shown in the above table speak for themselves. Performance is far higher than traditional portfolios and risk is far lower as measured by the high Sharpe Ratio.
  4. Market Crash Protection - A Dynamic Portfolio will not crash and burn as traditional portfolios did in 2008. Should either the Stock or Bond market start to dive sharply, the DP will automatically get out of that market and into either Cash or the other market if it is trending up. Look at the DP performance in the table for the crash year of 2008 as evidence of how well this worked.

It is for these reasons and others that the Dynamic Investment and Dynamic Portfolio are the perfect investments for 401(k) participants.

A Superior "Default" 401(k) Portfolio

The world of 401(k) investors is crying out for a high-performance, default portfolio that they can buy, hold and not worry about. Target Date Funds and ETFs were supposed to be that default investment but they have failed miserably and most are not even offered today. The NAOI Dynamic Portfolio is the perfect default investment that 401(k) plan providers should offer today; and will be forced to offer in the future. The company that offers it first will control this market, and it is huge.

The Potential

According to the Investment Company Institute, as of March 31, 2014, 401(k) plans held an estimated $4.3 trillion in assets and represented nearly 19 percent of the $23.0 trillion in U.S. retirement assets, which includes employer-sponsored retirement plans (both defined benefit and defined contribution plans with private-sector and public employers), individual retirement accounts (IRAs), and annuities. In comparison, 401k assets were $2.2 trillion and represented 16 percent of the U.S. retirement market in 2004. In 2012, about 52 million American workers were active 401k participants, and there were about 515,000 401k plans.

You can see the potential here of offering a superior product in the form of 401(k) Dynamic Investments and Dynamic Portfolios. Those that do will capture a huge market that dwarfs any other opportunity in the field of investing services!

An NAOI 401(k) Partnership

The NAOI is ready and able to work with any financial organization who currently offers, or wants to offer, a clearly superior 401(k) Plan. This can be done via an NAOI 401k Partnership or via NAOI Consulting. Any organization offering NAOI Dynamic Investments and Dynamic Portfolios will have an immense and immediate competitive advantage in this huge field of opportunity.

Contact the NAOI today to explore your options.

401(k) participants can relax knowing that their NAOI dynamic portfolios are automatically changing to take advantage of current market trends and to protect them from crashes

401(k) participants can relax knowing that their NAOI dynamic portfolios are automatically changing to take advantage of current market trends and to protect them from crashes