NAOI Announces the Release of "Dynamic Investments"
The Next Step in the Evolution of Investing
From the President of the NAOI
The National Association of Online Investors (NAOI) is excited to announce the development and imminent release of a next-generation investment type called Dynamic Investments (DIs). Discovered and developed based on a 5+ year research effort by the NAOI. Based on the input from user focus groups we are confident this investment type will define and dominate the future of investing.
On this DI Overview page you will learn about how DIs work and why they produce returns that today's MPT portfolios can't touch with lower risk and no active management required.
Finally! The field of investing has entered the 21st Century.
The Need for Change: Current Investing Methods Are Outdated
The NAOI has worked to educate individual investors for over 20 years. We have taught thousands of people the art and science of personal investing. We also interact with hundreds of average people with money to invest on a yearly basis. From their input we know that the investing public is not being well served by the financial services industry today. They find the world of investing so complex and confusing that they see little choice but to entrust their financial futures to financial advisors, accept their recommendations without question and then just hope for the best.
In 2008 when the markets crashed and the MPT portfolios we were teaching our students to created crashed with it, the NAOI saw that more than education was needed to empower investors. We needed to fix a much deeper problem. We had to face the fact that Modern Portfolio Theory was a dangerously outdated approach to portfolio design.
MPT was introduced to the investing world way back in 1952 when markets were a far different place. (See the chart nearby.) While markets have evolved, MPT has barely changed at all and it creates portfolios that simply cannot cope with modern markets. As a result, people are given portfolios today that produce mediocre returns at best with excessive risk and unreasonably high expenses.
The NAOI has fixed this problem with the development of Dynamic Investment Theory (DIT) and the new investment vehicle it creates called Dynamic Investments (DIs). DIT is at the very least a viable alternative to MPT and at most a complete replacement. It catapults the world of investing from the 1950's where it is "stuck" today, into the 21st Century where it belongs.
With the introduction of DIT and DIs, the world of investing has evolved as shown below.
The Evolution of Investing Timeline:
Here are several events that qualify as major evolutionary steps in the world of investing:
1952 - Introduction of Modern Portfolio Theory and Asset-Allocation Portfolios
1975 - Introduction of the first Retail Index Mutual Fund
1993 - Introduction of the first Retail Exchange Traded Fund
2017 - Introduction of Dynamic Investment Theory and Time-Diversified Portfolios
2018 - Release of Dynamic Investments to the Public
A Stunning Comparison between the Past and the Future of Investing
Below is a concise, but very revealing, comparison between how an MPT portfolio performed for the ten year period from the start of 2008 to the end of 2017 as compared to the performance of the simplest possible Dynamic Investment (DI), called the NAOI "Core" DI, for the same period. These two investment vehicles use the same Exchange Traded Funds (ETFs), one for Stocks and one for Bonds. The difference lies in the structure of the investment vehicle that works with them - the MPT portfolio is "static" while the DI is "dynamic".
MPT Portfolio Performance and the Problem
Modern Portfolio Theory (MPT) instructs us to create portfolios that match the risk tolerance of each investor. Risk is reduced by owning non-correlated assets such as Stocks and Bonds and the level of risk is determined by the allocation of money to each. Higher risk investors will get a higher allocation to Stocks. MPT portfolios require investors to hold BOTH winning and losing investments at all times. This reduces risk but also reduces returns.
MPT Management Strategy - Buy and Hold
Once the equities have been selected and an allocation has bee determined, an MPT portfolio is meant to be bought and held for the long term, MPT provides no guidance related to when and how to change its holdings. As a result, MPT portfolios have no sensitivity to market movements. The following diagram illustrates how an MPT portfolio is structured and "managed" on an ongoing basis.
For this illustration I have simply used a Total Stock and a Total Bond Exchange Traded fund to represent the two major, non-correlated assets. You can see that this is a "static" portfolio that will only change to when allocations need to be reset to their original percentages. It totally ignores market dynamics.
MPT Portfolio Performance 2008-2017
Below is the backtested performance of this portfolio for the period from the start of 2007 to the end of 2008 along with its Average Annual Returns and Sharpe Ratio - a measure of how much return was achieved for each unit of risk taken and the higher the better.
Almost all investors hold this type of portfolio today.
The Dynamic Investment Solution
Whereas an MPT portfolio is both static and "dumb", a Dynamic Investment is both dynamic and "smart". Its components are shown in the nearby diagram. It has what we call a Dynamic ETF Pool (DEP) that holds candidates for purchase by the DI. It also has the built in intelligence to periodically rank the ETFs in the DEP, using a price chart "trend indicator" to determine which is trending up in price most strongly. This is the ONE ETF held for one period until the DEP is ranked again and either the currently held ETF is kept for another period or changed if another ETF is moving up in price more strongly. A typical ranking period would be "quarterly".
Using this structure, a Dynamic Investment strives to hold ONLY winning investments while quickly selling or avoiding losing investments. We call this "time-diversification" and it not only reduces risk but also enhances returns! Time-diversification makes DIs "market-sensitive". DI designers don't need to consider the holders risk tolerance or asset allocation percentages - both being processes that are wide open to human error. The DI designer does not even need to worry about predicting which specific asset types or areas of the market will move up in price during the portfolio's life. The designer simply identifies a group of ETFs to place in the DEP and the MARKET periodically selects which to own at any one time.
DIT Management Strategy - Buy and Sell
Presented below is an illustration of the DI management process; one that is completely defined by the DI components and trades are signaled without human intervention. Note that in this example the periodic review period is "quarterly" thus the Q1, Q2, etc. time stamps on each holding. The review period is a varialbe defined by the DI designer.
This is a dynamic, intelligence and market-sensitive portfolio. MPT portfolios have none of these beneficial qualities.
Simple Dynamic Investment Performance 2008-2017
Here is the performance of the simple NAOI "Core" Dynamic Investment for the period:
The performance of this simple DI, one that only rotates between a Stock and Bond ETF depending on price trends, is stunning. What MPT portfolio, regardless of how sophisticated, earned anything close to +26% per year during this volatile period? None. What MPT portfolio designer could have possibly decided when to change the investments holdings in such a precise and timely manner? None. And this higher rate of return did not come with higher risk as evidenced by the Sharpe Ratio going up along with the returns.
Today's "experts" will say that this performance is impossible. And it IS impossible in the MPT-based world of investing. But when we break the chains of MPT methods and evolve to a DIT-based world of investing, many outcomes that are currently seen as impossible suddenly become probable. Something has changed here, something fundamental and wonderful. Let's next discuss what has changed and learn from it.
The New Concepts of Investing
Dynamic Investment Theory evolves the investing world beyond the MPT "Box" that is seen as "settled science" today. Below are just a few of the many new concepts that make a DIT-based world of investing a far different and more productive environment in which to work. Each is discussed in detail in The Amazing Future of Investing book discussed later on this page.
1. Dynamic Investments are the Market's First and Only Comprehensive Portfolio Products. DIs can be viewed and used as complete portfolio "products". Each specifies the ETFs to be used via its Dynamic ETF Pool (DEP) and how these ETFs are to be managed on an ongoing basis. In addition, DIs have the built-in intelligence to monitor market trends and change the ETF they hold to take advantage of current market trends. By being comprehensive, DIs can be seen as total portfolio products that can be bought off-the-shelf from a variety of vendors and held for the long term. The "productization of investing" is discussed in more detail just below this list. This is a huge step in the evolution of investing!
2. DI's Are Market-Sensitive. Unlike "static" MPT portfolios that once implemented completely ignore market changes, DIs are constantly monitoring market trends and changing the ETF they hold to take advantage of them. This makes DIs "dynamic" and "market-sensitive." Market sensitivity is a major reason why DIs produce returns that are significantly higher than buy-and-hold MPT portfolios with lower risk and no active management required. Market-sensitivity is required for a portfolio to thrive in today's volatile markets.
3. DI's Have a Universal Goal. The goal of MPT portfolios is to match the risk profile of each investor. This means that each is a unique, customized creation and the design process is a difficult and error-prone task. In contrast, DIs all have the universal goal of detecting market uptrends wherever and when-ever they exist in the market in order to maximize returns and minimize risk. This is a universal goal that has nothing to do with individual risk tolerance profiles. Therefore there is no need to customize DIs for each investor and this takes a significant element of risk out of the portfolio design process. As a result, the DI creation process is greatly simplified and the DIs created can be sold as standardized portfolio products.
4. DI's Introduce "Time-Diversity". Diversity is a critical element of any portfolio design. Both MPT and DIT portfolios take advantage of Asset and Company Diversity to reduce risk - but also reduce returns. DIs use an additional form of diversity called "Time-Diversity" that results from the DI being able to automatically signal ETF trades periodically based on market trends. This new form of diversity, introduced here for the first time, not only reduces risk but also enhances returns! The discovery of a new type of diversity for portfolio development is not a minor event.
5. DI's Simplify the Portfolio Design Process. MPT portfolio designers face the almost impossible task of trying to select specific equities that will to increase in price over the long-term period during which the portfolio is held . In contrast, DI designers have the luxury of selecting groups of ETFs to place in the DI's Dynamic ETF Pool and then letting the "market" select which one to buy at any one time based on the observed price trend strength of each. And history has shown us that the market is a far better predictor of future price trends than any one, or group of, human analysts. As a result, portfolio design just got a lot easier and more effective.
6. DI's Simplify the Portfolio Management Process. Modern Portfolio Theory (MPT) gives no guidance on how to manage a portfolio once implemented other than to suggest that it be bought and held for the long-term. In stark contrast, Dynamic Investments are designed with a specific set of rules for periodically reviewing market trends and changing the ETF they hold based on which ETF in its DEP is trending up most strongly. In other words, DIs have portfolio management rules built into the product design. No human subjective judgments are required.
7. DI's Reduce Dependency on Advisors and Salespeople. A major problem in the world of investing today is investor reliance on human subjective judgments and decisions. Such decisions can be adversely affected by bad data, faulty analysis, sales bias and even outright fraud. DIs eliminate this major risk factor by basing all trade decisions on the objective observation of empirical market trend data. Reducing or eliminating the human risk element is a huge leap forward in the evolution of investing and the implications are huge
8. DI Product Creation Is Simplified. The creation of today's primary investment vehicles in the form of Mutual Funds and Exchange Traded Funds requires a lengthy, difficult and expensive process. DI development requires none of these impediments to product development. DIs are created by simply combing existing ETFs into the dynamic structure discussed above on this page. Still, even though creating DIs is simple, designing "optimal" DIs for sale to the public requires training of the type offered in NAOI DI Design Classes discussed on this page.
9. DI's Unlock Massive Hidden Value in an ETF Product Line. An ETF product line represents a valuable asset for its developer. The introduction of Dynamic Investments can multiple that value virtually overnight. Here's how: DIs monetize the combination of existing ETFs into the DI structure shown above. By doing so they uncover massive value that is currently hidden in an existing ETF product line. Through the use of DIs an ETF developer can create an extensive DI-based product layer consisting of ETF combinations. And each DI will be a portfolio product that can be sold directly to the public. Thus, not only does the introduction of DIs enable the creation of an unlimited number of new and valuable DIs, it also significantly expands the market reach of ETF developers and opens the potential for massive new revenue streams.
10. DI's Open a Vast and Virgin Field of New Product Development. The world of new investment product development today his hitting a wall. Most mutual funds and ETFs track market indexes. The problem is that there are a limited number of indexes and most of these already have an ETF tracking them, sometimes several. So in order to be unique new products are increasingly more narrow, more exotic and more risky. The average investor will not buy them. DIs break down this wall. There are an unlimited number of new and powerful DIs that can be created for a full spectrum of investing goals. Research and development dollars spent designing optimal Dynamic Investments will provide a far higher ROI than the same dollars spend on developing traditional mutual funds or ETFs. There are no "walls" to be hit in the field of DI development.
11. Higher Returns without Higher Risk! This evolutionary change in investing is a stunning one. MPT says that higher returns always come at the price of higher risk. If this isn't true the entire theory crumbles. Well, DIT says that it isn't true. Using DIs, higher returns can be produce by simply placing more ETFs in the Dynamic ETF Pool and giving the DI more areas of the market to search for uptrends. Granted, simply adding any ETF to the DEP does not automatically increase returns. But with NAOI DI training, DI designers will know how to select the ETFs that make higher returns possible. Following is a performance comparison between the simplest DI, discussed above on this page, with the NAOI Primary DI that has just one more Stock ETF added to its DEP.
You can see that by adding another ETF to the Dynamic ETF Pool, and giving the DI one more area of the market to search for price uptrends, return was increased significantly without additional risk as indicated by the increased Sharpe Ratio that shows the amount of return for each unit of risk take.
12. DIs Can Be Used Today! Change of the nature discussed here does not come easily to such a staid industry and financial and investing services. That is why the NAOI has created a simple but powerful transition plan from the old to the new. In this plan, DIs are used as simply one building block in an MPT, asset-allocation portfolio. We call this an MPT/DIT Hybrid Portfolio. In this structure the DI will act as both a performance booster and a risk reducer. And the portfolio designer can transition to the future of investing by simply increasing the allocation to the Dynamic Investment. Thus, DIs can be put to use today! There is no need to wait for the entire industry to accept them, which they eventually must to remain competitive. Hybrid Portfolios are discussed on the page at this link.
The Holy Grail of Investing Is Found
All of the above factors and others contribute to the most significant change in investing since 1952 when Modern Portfolio Theory was introduced. This evolutionary leap is the "productization of investing." When portfolios become standardized consumer products the entire industry changes - for the better.
Let's briefly review what makes Dynamic Investments "portfolio products"
- A universal goal, there is no need to customize each to match an investor's risk profile
- Each DI is a comprehensive and self-contained investment. It specifies the ETFs to work with as well as how they are to be managed on an ongoing basis
- Once a DI is created, its design does not change even though the ETF it holds at any one time does. This is an active investment that is passively managed - a necessity for its "product" status
- Developers can mass market the "best" Dynamic Investments they create via catalogs like the one shown below. Investors them simply buy, and combine if they wish, the ones that meet their unique needs
The Productization of Investing is the Holy Grail of the financial world that experts have been seeking for decades. They haven't found it. With the discovery, development and release of Dynamic Investment Theory and Dynamic Investments, the NAOI has.
The Productization of Investing and its transformative effects on how we invest today is discussed in detail in The Amazing Future of Investing book discussed just below.
Your Path to the Future of Investing
The world of investing is about to change at a fundamental level. This change is not optional. The NAOI is teaching Dynamic Investment Theory and the use of Dynamic Investments to the public. When they learn about the advantages and performance of DIs they will demand them. Those organizations and advisors who offer them will gain a significant competitive advantage and capture a massive market that is now afraid to even enter the market.
In addition, DIs are so simple to implement and manage that if individuals can't find an advisor who offers them they can easily do so themselves using an online broker. And they will earn returns that no MPT portfolio in existence can top.
Those who learn about and embrace DIs first will benefit the most. Following are the action items that will enable you to do so:
- Read the information on this site.
- Signup to the NAOI Updates Email List at the bottom of any page to be among the first to be alerted when new DI developments and releases occur
- Purchase and read The Amazing Future of Investing book, shown at right, from the NAOI store
- Take advantage of one or more of the DI Support Resources discussed at this link
- For financial organizations consider an NAOI Consulting Contract as discussed at this link
- Contact NAOI President, Leland Hevner, directly at LHevner@naoi.org with any questions or for additional information.
Dynamic Investing represents the evolution of investing into the 21st Century. Those who understand and act on the information provided by the NAOI will thrive moving forward. Those who ignore it will struggle to survive.