Dynamic Investment Theory creates an innovative investment type called NAOI Dynamic Investments. A short description of DIs is provided on this page. More details are found in the book shown at the bottom of the page.

The Anatomy of an NAOI Dynamic Investment

Using the logic and rules established by DIT, an unlimited number of Dynamic Investments can be created to meet a full range of investing goals. But regardless of the investing goal targeted, all DIs have the same components and structure as illustrated in this diagram.

Here is the description of each DI component:

1. Dynamic Equity Pool (DEP) - This is where a DI designer places two or more ETFs (or mutual funds) that are “candidates” for purchase by the DI at a Periodic Review event as described next.

2. Review Period - This is how often the DI ranks the ETFs in the DEP to find the one having the strongest price uptrend. The “winner” is the one ETF purchased, or retained if already owned, and held until the next Review event.

3. Price Trend Indicator - This is the technical indicator that NAOI testing has shown to be the most effective for ranking the ETFs in the DEP by strength of upward price trend.

4. Trailing Stop Loss Order- A Trailing Stop Loss order is placed on each ETF purchased by the DI to protect its value from sudden and significant price drops during the short holding period between Review events.

Each of these components is a variable that is defined by a DI designer to meet specific investing goals. But the NAOI has found that setting all of these variables as constants except for the ETFs in the DEP works extremely well and greatly simplifies the design process.

The Performance of a Simple Dynamic Investment; 2008-2019

Do Dynamic Investments meet the goals set for us by the investing public? Significant NAOI testing shows that the answer is a resounding YES. The table below shows the historical performance of the simplest possible DI that holds only a Total Stock Market ETF and a Total Bond Market ETF in its Dynamic Equity Pool (DEP) as compared to an MPT portfolio using the same ETFs with the allocations shown. The DI reviews the price trends of each ETF on a Quarterly basis and purchases, or retains if already owned, the ETF having the strongest price uptrend for the past Quarter. This is the one ETF held by the DI until the next Review.

During this period, the Dynamic Investment held the Stock ETF for 1694 days and the Bond ETF for 1327 days. Trades were signaled based on objective observations of empirical market data, with no human judgments involved meaning that the DI can easily be managed by individuals using an online broker and it can also be completely automated.

How do DIs produce such incredible returns without increased risk? The answer is that DIs are market-sensitive, capable of automatically changing the ETFs they hold based on a periodic sampling of market trends. This makes them “time-diversified” in addition to company and asset-class diversified. And while the diversification elements of MPT portfolios (company and asset) both reduce risk and reduce potential returns, time-diversification reduces risk and increases returns.

The NAOI “Alpha” Dynamic Investment

The above DI example is as simple as it gets, holding in its DEP only 2 ETFs - one for Total Stocks and one for Total Bonds. And the returns were amazing. But higher returns without higher risk are possible by simply adding more and different ETFs to the DEP. An “enhanced” DI that adds to the Simple DI’s Dynamic ETF Pool an ETF that tracks a Small Cap Growth index and an ETF that tracks a Long-Term Government Bond index produced the performance shown below.

You can see that by adding carefully selected ETFs to the Simple DI, average annual returns increased significantly as did the Sharpe Ratio - meaning that additional returns were achieved without additional risk. MPT says higher returns come only with higher risk. DIT says that this is not true. Higher returns can come from a more effective selection of ETFs in the DEP. Remember, we are now outside of the MPT “box” and working with a new set of rules.

To view expanded performance data go to this link that shows yearly performance, average annual returns and the Sharpe Ratio. It also show updated quarterly performance for both the Alpha DI used above and the NAOI Universal Dynamic Portfolio discussed at this link.

The Unique Nature of Dynamic Investments

The market has never seen an investment type like DIs; they were developed by thinking differently about investing. DIs can be used as both total portfolios or they can be used as one component of an DIT/MPT hybrid portfolio as discussed on the next page of this submenu at this link.

Here are just a few features of DIs that make them unique.

• Higher Returns with Lower Risk. By being able to automatically change the ETF they hold, DIs are capable of buying only equities moving up in price and avoiding, or quickly selling, those that are trending down in price. They are the market’s first “time-diversified investment.

• Absolute Protection from Market Crashes. From over two decades of working with individual investors, the NAOI knows that their greatest fear is the substantial loss of money due to market crashes that happen on average every 6 years. DIs provide absolute protection from market crashes via the use of Trailing Stop Loss orders. This feature alone will bring thousands of individuals into the market with confidence and without fear.

• A Built-In, Intelligent Trading System. MPT portfolios fail today because they are “static”, providing no plan for buying and selling. That is left to the discretion of an advisor. DIs have an automated trading system built-in to the design via periodic reviews. And trades are made based on objective observation of market data, not on subjective human judgments - removing a massive risk element that plagues investing today.

• A Comprehensive Investment “Product” - DIs are the market’s first investment type that specifies not only the ETFs to work with but also how they are to be managed on an ongoing basis. Thus, they are plug-and-play investment “portfolio products” that individuals can buy off-the-shelf from a variety of vendors and simply hold for the long-term with the confidence that the DI is signaling trades as needed to take advantage of current economic conditions. DIs open a new era of investment “productization”, the holy-grail of the investing world.

• Ease of Creation. New investment products today such as ETFs and Mutual Funds are expensive and time-consuming to create. And it is becoming virtually impossible to identify truly unique investing products. In contrast, creating new DIs is simple, easy and low cost. And each will produce higher returns with lower risk than any newly created Fund or ETF.

• Ease of Management. MPT provides no guidance for managing a portfolio on an ongoing basis other than to buy and hold. As a result there are no standards for when to rebalance a portfolio and/or make changes to respond to economic conditions. Dynamic Investments offer exact rules for when trades are to be made to take advantage of market changes. And because these trades are signaled by objective observations of empirical market data, DI management can easily be automated.

• Reducing the “Human Risk” Element of Investing. There exists in market today a massive “human risk” factor. This risk arises from the fact that the standard investing process is filled with subjective human judgments that include the determination of an investors risk tolerance, the selection of equities to place in a portfolio, when and how often a portfolio should be reviewed and/or rebalanced and when trades need to be made in response to changing market conditions. All of these subjective human judgments, and others, expose a portfolio to the risk of bad data, incorrect analysis, lack of attention, sales bias and even frauds and scams. Unfortunately, using MPT methods the effectiveness of an individual’s portfolio is largely dependent on the advisor people choose to work with - an often arbitrary decision. DIT and DIs remove most of this risk by basing portfolio design and trade decisions on objective observations of market data. When the human risk element is reduced or eliminated from the investing process the world of investing becomes much simpler, more profitable and less risky for the investing public,

• And More. Via Consulting Agreements and Partnerships the NAOI can show organizations that we work other reasons why DIs will change the world of investing at a fundamental level. For more information on working with the NAOI, go to this link.

Based on extensive testing we have found that Dynamic Investments are capable of producing returns that are significantly higher than MPT portfolios in all economic conditions with lower risk as shown in the performance examples presented above on this page. And they provided the absolute protection from market crashes that individual investors want and need to enter the market without fear. The NAOI has been teaching DIT methods and the use of DIs to our students for several years and they tell us that this is finally the approach to investing that will enable them to enter, or re-enter, the market with confidence.

A Vast New World of Product Development Opens Its Doors

By changing the number and/or type of ETFs in the DEP, designers can easily create an unlimited number DIs that target a full spectrum of investing goals and this opens the doors to a massive world of new product development. The NAOI offers DI Design Classes that teaches individuals and organizations how to create their own proprietary DIs as discussed at this link. And unlike current new-product development in the form of ETFs or mutual funds that is expensive and time consuming, DI product development is simple, quick and inexpensive.

Up Next - The Rise of Dynamic Portfolios

As mentioned above, DIs can be the only investment held in an individual’s portfolio; providing performance that MPT portfolios can’t touch. But we have found that both individuals and advisors are reluctant to dedicate all of their portfolio money to just one ETF at a time. And this is understandable. So, the NAOI has developed Dynamic Portfolios that use DIs as building blocks in an MPT portfolio configuration. This amazing new portfolio type is discussed next, on the page found at this link.