A Superior Investment Vehicle!
Dynamic Investment Theory produces a unique investment type called Dynamic Investments (or DIs for short). These are very powerful investments, different from anything available in the market today. On this page you will learn what they are, how they work, their component parts and the astounding returns they are capable of producing. Each of the topics presented here is discussed in detail in The Amazing Future of Investing book published by the NAOI.
What Are Dynamic Investments?
Dynamic Investments are a new type of investment - the first significant advancement to the field if investment products since the creation of Exchange Traded Funds (ETFs). They are created based on rules set forth by Dynamic Investment Theory. DIs meet the goals set for the NAOI when describing a better approach to investing. They are sufficiently simple for investors of virtually all experience levels to implement and manage on their own, yet they have been shown to produce returns that today's financial advisors will say are impossible.
Dynamic Investments are designed to sample market conditions on a periodic basis and search for asset types and/or market segments that are moving up in price. Based on empirical observations of market movements at review time, a DI then buys an ETF that is capable of capturing the positive returns potential of uptrending assets / markets. The ETF purchased is held until the next regularly scheduled review when the DI samples the market again and either continues to hold the ETF it owns or replaces it with another ETF that is moving up in price more strongly.
In this manner DIs automatically and without the interference of human judgement strive to hold ONLY equities that are moving up in price while selling (or avoiding) equities that are falling in price. By doing so, 20%+ returns are possible in virtually any economic condition. This is in direct contrast to MPT based portfolios that are designed to hold both winning AND losing equities at all times and count 8% returns as a major victory.
Components of Dynamic Investments
To accomplish the goal of finding positive returns that exist in the market in all economic conditions the NAOI has defined the following components shown in the diagram below that are part of all Dynamic Investments. Each of the following component is a variable that is defined by a DI designer. Each component is defined below the diagram and all are discussed in significantly more detail in The Amazing Future of Investing book that can be purchased in the NAOI Store.
- A Goal - There are an unlimited number of DIs that can be created. Each should have a goal such as maximum return, maximum Sharpe Ratio, dynamic Emerging Markets, etc.
- A Dynamic ETF Pool or DEP - This component is a list of from 2 to 20 ETF candidates that the DI ranks at review time to determine which is trending up most strongly. The "winner" is the ETF that the DI buys and holds until the next review period. A DI's DEP defines the areas of the market in which a DI searches for positive returns. Defining optimal DEPs is critical to the effectiveness of a DI. It should contain a combination of ETFs such that in any market condition at least one is moving up in price.
- A Review Period - DIs are reviewed on a defined regular basis to ensure that the ETF it holds is taking maximum advantage of market trends. During the review the DEP is ranked to find the ETF that is trending up most strongly. If the currently held ETF is still at the top of the list then it is held until the next review. If another ETF in the DEP is moving up more strongly then that ETF is bought and held until the next review. A typical review period is quarterly although to add more market sensitivity to the DI it can be reviewed monthly.
- A Trade Signal - This is price chart indicator used to measure an ETF's price trend and the strength of its trend. It is applied to each ETF in the DI's DEP at time of review The NAOI has identified several excellent trend indicators that are extremely effective and can be easily found on a variety of financial Web sites.
- Trailing Stop Loss Order - Because a Dynamic Investment holds only one ETF at a time, its value must be protected. A Trailing Stop Loss order automatically gets the DI out of the market should its price fall by a predefined percentage.
These are the simple components of all Dynamic Investments that make it sensitive to market conditions, able to detect areas of the market that are trending up in current market conditions and capable of automatically capturing the positive returns potential that exists in all economic conditions.
While the components of the DI are simple, designing optimal DIs takes work. The NAOI offers training classes that teach developers how to create high performing DIs for any given goal. Optimal DIs for any goal are very valuable assets for developers that discover them.
Example Dynamic Investment Performance
The NAOI has designed multiple Dynamic Investments for a variety of goals. Described below on this page are two of the simplest. They are presented to show the performance potential of the DI investment type and to illustrate how changes in one simple variable can have a profound effect on this performance. For these examples "performance" is defined as Average Yearly Returns for a backtest period along with the DI's Sharpe Ratio that is a measure of the amount of return received for each unit of risk taken. A investment with a Sharpe Ratio over 1.0 is seen as a superior investment.
The NAOI Core DI Performance
The NAOI Core Dynamic Investment is the simplest DI possible. It holds only a total stock market ETF and a total Bond market ETF in its Dynamic ETF Pool. The following table shows its performance during the volatile backtest period from the start of 2008 to the end of 2017.
Performance for 2008-2017
The NAOI Primary DI
The next example is the NAOI Primary DI that simply adds one more ETF to the Core DI's DEP. The results presented below show that returns can be increased by expanding the area of the market in which the DI searches for positive returns. A DI's market reach is expanded by adding more ETFs to its Dynamic Investment Pool (DEP). And this additional return does not come with higher risk as shown by the Sharpe Ratio going up as well. This is a huge leap forward in the evolution of investing.
Performance for 2008-2017
You can see that not only did returns increase by adding an additional ETF to the Core Dynamic Investment's DEP but so did the Sharpe Ratio which is a measure of risk. Thus, in the world of Dynamic Investments, higher returns DO NOT come at the cost of accepting higher risk, they come with the addition of ETFs to the DI's DEP, and this blows Modern Portfolio Theory out of the water!
Dynamic Investment Portfolios
Dynamic Investments hold only one ETF at a time. Yet a DI can be the only investment that an investor holds. Despite the fact that a DI owner holds only one ETF at a time with 100% allocation to it, DI's have significantly more and better risk reduction factors than do MPT portfolios.
The major such factor is "time-diversification" meaning that the ETF held is reviewed and changed if needed periodically in response to market conditions. Still, many NAOI students are not comfortable holding only one ETF at a time as their total portfolio. Thus, the NAOI has also designed DI portfolios that hold multiple DIs, each contributing its own strongest uptrending ETF to the portfolio's holdings. A Dynamic Portfolio designer thus has another variable to define, namely the allocation of money between or among the DIs in the portfolio.
The table below shows the backtest results of a simple Dynamic Portfolio that at any one time will hold up to two ETFs. You can see that by holding two ETFs instead of one the Dynamic Portfolio risk is reduced as indicated by the higher Sharpe Ratio.
Performance for 2008-2017
MPT / DIT Hybrid Portfolios
The NAOI believes that Dynamic Investments and DI Portfolios are the wave of the future and that the public will demand them. However the change is dramatic. To "ease" both the public and the financial establishment into the new world of dynamic investing, the NAOI has created what we call Hybrid Portfolios that combine elements of both MPT portfolio design and DIT design. Thus a transitional Hybrid portfolio may have the following allocations:
- Bonds - 25%
- Stocks - 25%
- Stock / Bond Dynamic Investment - 50%
Let's assume that this Hybrid Portfolio holds one total stock market ETF, one total bond market ETF and a Simple Dynamic Investment that rotates between the stock ETF and a bond ETF based on current market trends. This means that the portfolio's asset allocation will automatically switch between 75% stocks / 25% bonds and 25% stocks / 75% bonds on a periodic basis based on market trends. We call this the NAOI Market-Biased Portfolio
The following table shows how this Hybrid portfolio would have performed during the period from 2007 to 2016.
Performance for 2008-2017
This Hybrid Portfolio changes its stock/bond allocation automatically based on market conditions. You can see that it performed better than virtually any MPT portfolio for the same period of time. While the returns are not as great as stand-alone Dynamic Investments, this transition portfolio methodology can help both individuals and professionals make the transition from static investing to dynamic investing less disruptive.
This page only presents a quick overview of Dynamic Investments; their use and their performance. DIs are discussed in greater detail in The Amazing Future of Investing book that can be purchased in the NAOI Store. After reading it you will be fully capable of implementing and managing basic NAOI DIs on your own.
Dynamic Investment Development Opportunities
The field of Dynamic Investments represents a vast, virgin field of opportunity for investment developers. There are an unlimited number of DIs that can be created for an unlimited number of goals. And each new and better DI that is developed can become a very valuable asset on the balance sheet of the creating organization and the source of a significant new stream of revenue as they can be sold to the public or licensed to other companies much as ETFs or Market Indexes are today.
Plus, DIs do not need to be time consuming or expensive to create. Any organization that currently owns or sells a line of ETFs can create new DIs by simply combining the them in the Dynamic ETF Pool of a new Dynamic Investment. All that's needed is training on how to do so. For this purpose the we offer the NAOI Dynamic Investment Training Class that is described in the Products section of this site.
Join Us: An Investing Research Partnership
It is clear that Dynamic Investment Theory opens the doors to a vast new world of superior investments, strategies and portfolios. However, to design optimal Dynamic Investments is both an art and a science. The NAOI has developed several exceptional DIs as shown above. But other, even better performing, DIs are waiting to be discovered by a skilled developer.