Fundamental Changes to Investing Are Coming
The future of investing will not look like it does today. It can't. The Modern Portfolio Theory (MPT) portfolio design methods that are in universal use today no longer work in modern markets. At it's no wonder; they were introduced in 1952 when markets were a far different place.
From our extensive contact with the public via our investing education courses, we know that individual investors own portfolios that are not capable of taking full advantage of the significant positive returns potential made available by today's volatile markets. They also own portfolios that are dangerously exposed to the risk inherent in these markets. The industry simply has not given the public the tools to either maximize returns or to minimize. This is about to change.
Dynamic Investment Theory (DIT), that you are learning about on this site, is the first approach to portfolio design and investing in general that is designed specifically to work in 21st Century markets. Extensive testing by the NAOI shows that DIT produces significantly superior portfolios than decades-old MPT methods.
New Investing Concepts Introduced by Dynamic Investment Theory
DIT and the use of DIs introduce dozens of fundamental changes to how investing works today. Below I summarize list a very few to illustrate the types of changes that are coming to the world of investing in the very near future. You can read more about these and others The Amazing Future of Investing book that can be purchased in the NAOI store. Prepare to be amazed.
1. From "Static" Investing to "Dynamic" Investing. The future of investing will be dominated by "dynamic" investments. MPT portfolios in universal use today are meant to be bought and held for the long-term. This makes them "static" investments that have no ability to react to market changes. In contrast, Dynamic Investments (DIs) embrace a buy and sell management strategy. They have the built-in intelligence to constantly monitor market trends and strive to hold only ETFs that are moving up in price while quickly selling or avoiding those that are moving down. This makes them "dynamic" investments that are far better able to take advantage of today's market volatility.
2. Introducing Time-Diversification and Market Sensitivity. Adding diversity elements to an investment or a portfolio is always a good thing. Both MPT portfolios and Dynamic Investments are fully company and asset diversified. But DIs also are "time-diversified" by being able to automatically signal when changes need to be made to the ETFs they hold to thrive in current economic conditions. And whereas both company and asset diversification only reduce risk, time diversification reduces risk AND enhances returns.
3. Higher Returns with Less Risk. - MPT portfolios must hold both winning and losing investments at all times to reduce risk. Because DIs are dynamic and time-diversified, they are designed to hold ONLY winning investments. This results in significantly higher returns with less risk than is possible with MPT portfolios. An example of the superiority of DI performance is shown below using the NAOI Core DI returns as compared to an MPT portfolio with the allocations shown. The Core DI simply rotates automatically between a Stock and a Bond ETF based on an objective measurement of market trends. The MPT portfolio holds both of the same ETFs at all times regardless of market conditions. See the difference that "time-diversity" makes?
4. Dynamic Investments (DIs) Have a Universal Goal. - In today's MPT world of investing portfolios are created to match the risk profile of each individual investor. Determining risk tolerance for each investor is a very unscientific and error prone process. In contrast, DIs all have the same goal of searching for and capturing positive returns where ever and whenever they exist in the market. This is a universal goal that works for all investors regardless of risk tolerance level. This fundamental change sets the stage for the"Holy Grail of Investing", namely the productization of investment portfolios as discussed next.
5. DIs "Productize" the World of Investing. Modern Portfolio Theory shows how to combine assets to reduce risk. That's it. MPT has nothing to say about how a portfolio is to be managed. In contrast, DIT not only shows how to select ETFs to work with in order to meet a specific goal, it also provides strict rules for ongoing management. Thus, unlike MPT portfolios, DIT portfolios are comprehensive investments that can be seen as portfolio "products". This means that they can be bought "off-the-shelf" from a variety of vendors and sold via DI Product Catalogs like the one shown just below. The implications of the "productization of investing" are huge! They are discussed in detail in Chapter 8 of The Amazing Future of Investing book that can be purchased here.
Dynamic Investment "Product" Catalog Example
6. Ease of New DI Product Creation. Today the creation of new investment products such as Mutual Funds and Exchange Traded Funds is a complicated, time-consuming and expensive process. In contrast, creating new DIs is easy. DIs are created by simply combining existing ETFs in the NAOI-defined Dynamic Investment structure and defining a few variables. Companies and individuals can create an unlimited number of powerful DIs virtually overnight with little cost and effort. And ETF creators can exponentially expand their product line, open new revenue streams and uncover massive "hidden value" by creating a new DI product layer consisting of ETF combinations.
7. Reducing the Human Risk Element. A major problem with the way we invest today is that virtually all portfolio design and trade decisions are based on subjective human judgments that leave the door wide open to all manner of bad things such as bad data, flawed analysis, sales bias and even investing fraud and scams. The "human risk" element is a huge negative. This risk element goes away with the use of DIT methods in which all trade decisions are based on objective observations of market trends. In other words, the "market" triggers trades, not people. And history has shown that the market is a lot better predictor of future price trends than any one or group of analysts or advisors.
8. Automatic Changes in Asset Allocation. In the MPT world of investing portfolio asset allocation is determined based on the very ambiguous determination of an investor's risk tolerance. And then the goal is to simply maintain this allocation for the long term. This results in a portfolio that has no chance of taking full advantage of market dynamics. In contrast, DIT-based portfolios have the built-in intelligence to automatically change their asset allocation based on current market trends. Thus, using DIT methods, there is no need go through the almost impossible process of trying to determine an an up-front allocation that will work for the long-term.
9. Dynamic Portfolios. Single Dynamic Investments have many of the characteristics of today's multi-investment portfolios. They are asset, company and time diversified which gives them the risk reduction elements needed to qualify as a complete portfolio. In fact, one DI can be a person's total portfolio. But DIs can also serve a portfolio building blocks that can be combined to meet a full spectrum of specific goals. Such Dynamic Portfolios take the world of product development to a whole new level. They are essentially portfolios of portfolios. And the development possibilities that are opened by this fact are astounding. Read more at this link.
10. Customization at a Different Level. DIT creates Dynamic Investments that have a universal goal of providing maximum returns with minimum risk in any economic condition as discussed in Point 4, above. They don't care about any investor's risk tolerance level and have no need of customization. In the DIT world customization to meet specific goals is done at the Dynamic Portfolio design level by deciding which DI portfolio building blocks to combine. This is a far easier and more effective way to meet the unique needs of an investor than trying to determine their risk tolerance level.
11. The Introduction of a Portfolio Benchmark Standard. Because MPT portfolios are customized creations for each investor, there is no way to compare their performance to determine their effectiveness and/or the competency of the portfolio designer. Thus, today there is no portfolio "benchmark" that could give us this information. This about to change. The simplest Dynamic Investment, called the NAOI Core DI, rotates only between holding a total Stock ETF and a total Bond ETF based on market trends. It is so easy implement and manage that any MPT portfolio that produces lower returns or higher risk must be seen as an inferior investment. Thus, the NAOI Core DI can be used as a standard benchmark against which the quality of all MPT portfolios can be measured. Here is an example of a DI Benchmark worksheet that will compare the performance of your portfolio, or any portfolio, with that of the simple Core DI.
12. Built-In Value Protection. MPT portfolios typically have no automated protection from major market crashes such as the one we saw in 2008. As a result they are vulnerable a major loss in value in short periods of time. In contrast, Each Dynamic Investment has a built-in Trailing Stop Loss order that automatically sells the ETF held if it drops by a certain amount while held. The ETF held will then be replaced at the next Review Period as described on this page. Thus any one DI or a group of DIs in a Dynamic Portfolio are at all times protected from a significant drop in value.
New Investing Concepts Summary
These are only a few of the changes that will result from the introduction of Dynamic Investments into the world of investing. You can see that these are not "tweaks" to how we invest today. They represent a fundamentally different way of investing. And by breaking the "chains" of MPT methods, performance numbers that today's experts will say are impossible, suddenly become probable!