Welcome to a Web page that describes how the introduction of Dynamic Investment Theory (DIT) and the new investment type it create, called Dynamic Investments (DIs), will soon change the world of investing at a fundamental level. Currently this page is accessible only by individuals who I, Leland Hevner - NAOI President - have sent a message to via LinkedIn. I believe that you will benefit the most by learning about this innovative approach to portfolio design and management first.

Author of this Page: Leland Hevner, President of the National Association of Online Investors (NAOI)
Time to Read this Page: 20 minutes
Benefits of Reading this Page: Learn how to: create superior investment products, quickly expand your client base, gain a massive competitive advantage in the field of financial services and get just a glimpse into the future of investing.

Why Change Is Needed

Based on 20+ years of teaching personal investing and interacting with thousands of individuals, at the NAOI we know that far too many people who need investing income are not participating in the market. Why? Because they are afraid of exposing their financial futures to the risks of owning static, buy-and-hold MPT portfolios in modern volatile markets. The potential for significant losses is just too high. To bring these people, who number in the tens of thousands if not millions, into the market without fear, fundamental change is needed.

Approaching Investing from a Different Direction

The NAOI has created the change needed in the form of Dynamic Investment Theory (DIT) and Dynamic Investments (DIs). This innovative approach is the result of the NAOI R&D team thinking differently about how investing could, and should work to better meet the challenges of modern markets and the wants/needs of the investing public.

On this Web page you will learn that MPT is NOT the only viable approach to portfolio design and management. You will see that DIT is a viable, and in our opinion, superior alternative. The following discussion shows why by comparing MPT methods to those of DIT.

MPT Portfolios - “Investor-Sensitive”

Today’s standard approach to portfolio design is based on Modern Portfolio Theory (MPT), an investing approach introduced to the market in the 1950s. While markets have evolved significantly since then, MPT has barely changed at all and the portfolio design and management methods it uses are no longer optimal in modern markets. Here’s why:

MPT portfolios are what we call investor-sensitive. They are customized to match a “guesstimate” of the risk tolerance of each individual via the use of asset class allocation techniques. More aggressive portfolios get a higher allocation to stocks and less aggressive portfolios get a higher allocation to bonds. Then they are meant to be held for the long-term, regardless of changes in economic conditions. This methodology reduces risk but also reduces returns.

A major problem with MPT methods is that the asset allocations used to define a portfolio’s risk level when created quickly change as markets move up and down, meaning that a conservative portfolio can become an aggressive portfolio in a very short time. To revert to an MPT portfolio’s initial risk profile it needs to be periodically rebalanced. Yet MPT’s buy-and-hold strategy prevents this rebalance from happening in a timely manner. Typically advisors only rebalance a portfolio only once per year to avoid short-term capital gains taxes. As a result conservative investors may find themselves holding an aggressive and very risky portfolio for the better part of a year. And should the stock market experience a correction or a crash, MPT holders can suffer considerable losses - even when initially given a conservative portfolio.

Individuals who understand these problems and the risks of holding industry-standard, MPT-based portfolios are leaving, or not entering, the market in large numbers.

DIT Portfolios - “Market Sensitive”

In contrast to MPT portfolios, DIT-based portfolios are market-sensitive. They have the universal goal of maximizing returns while minimizing risk in all economic/market conditions. To meet this goal they automatically signal trades based on a periodic sampling of market price trends and holding only ETFs that are trending up in price while avoiding or quickly selling those that are trending down.

By constantly and automatically monitoring market trends and making trades as needed, DIT portfolio are “time-diversified” and capable of producing returns that MPT portfolios can’t match and with significantly lower risk. Plus, since DIT portfolios have a goal that works for all investors, regardless of their risk profile, they don’t need to be customized for each investor; removing a massive “human-risk” element from the investing process. And DIT portfolios automatically make changes to thrive in current markets the problems related to MPT rebalancing issues go away.

Some reading this section may think that the buy-and-sell strategy of DIT-based portfolios is not feasible for two reasons as follows:

• Short-term capital gains will be incurred. The NAOI has two responses to this issue. First, extensive testing has shown that DIT portfolio gains are typically much higher than MPT portfolio gains even after subtracting additional taxes. Second - most individuals today invest within retirement accounts where no capital gains taxes apply.

• People can’t “time the market”. The NAOI agrees that PEOPLE can’t time the market but MARKET TRENDS can. They have been used for decades by hedge funds to produce out-sized gains. They key is understanding how to use them in a safe and effective manner. The NAOI has discovered how to do just that.

Dynamic Portfolios - This Is the Future of Investing

Today the only option given to investors for the creation and management of portfolios is MPT. I discussed how this approach works above on this page along with its problems. In the near future, with the release of DIT to the market, investors and advisors will have choices for the design and management of portfolios - MPT and/or DIT

The NAOI is not advocating that DIT replace MPT - both have advantages. We believe that the future of investing will be dominated by portfolios that utilize both approaches to create what we call Dynamic Portfolios as illustrated by the following diagram. (Note that the allocations used can be determined by the portfolio designer but those shown below work quite well as explained in Point 8 in the Benefits List discussed next.)

When Stocks are trending up this portfolio will have an 80% allocation to Stocks and a 20% allocation to Bonds. When Stocks are trending down it will hold 70% Bonds and 30% Stocks. And this change is made automatically with no subjective judgments required. How this happens is explained in detail in the NAOI White Paper found at this link.

This portfolio has FOUR diversification types as follows:

• Those used by the MPT Segment: Company diversification and Asset Class diversification. These diversification elements reduce risk but also reduce returns.

• Those added by the DIT Segment: Time diversification and Management diversification (buy-and-hold and buy-and-sell. The DIT diversification elements both increase returns and decrease risk.

The Top Benefits of Using DIs for Individual Investors

Below are listed just a few of the benefits that will be realized by investors who use Dynamic Investments and Dynamic Portfolios. Below this list is another list that show the benefits of using this new approach for advisors and investing professionals. Details for each are found the the NAOI white Paper that can be accessed at this link.

1. A Greatly Simplified Investment Product

DIs provide investors with a simple, logical approach to investing that people of all experience levels can understand without extensive financial education. DIs are so simple to implement and manage that individuals can take advantage of them on their own using an online broker if they wish.

2. Higher Returns with Lower Risk

The DIT approach consistently provides users with higher returns and lower risk than MPT portfolios in all economic conditions. Returns of +20% per year are not uncommon and DIs rarely lose money in any year as they earn positive returns in both bear and bull markets.

3. Protection from Market Dips and Crashes, Lowering the Stress Investing

By avoiding or quickly selling down trending equities, DIs provide users with absolute protection from market crashes; dramatically lowering the stress level of investing in modern volatile markets. This benefit alone will bring thousands of individuals into the market who are now on the sidelines in fear.

4. Elimination of the Human-Risk Element in Trade Decisions

By basing trades on objective observations of market data , DIs eliminate a massive area of risk arising from trade decisions made based on subjective human judgments that are the cause of so much that is wrong with investing today.

5. DIs are Investment “Consumer Products”

DIs are the market’s first “comprehensive” investment. They not only specify the ETFs to work with but how they are to be managed on an ongoing basis. Trades are signaled at predefined intervals (e.g. quarterly) to determine if the DI should change the ETF it is holding based on the price trend of each ETF purchase “candidate” in the DI’s Dynamic ETF Pool. No human judgments are involved in the trading decision. As a result of being comprehensive, DIs can be seen as portfolio “products” and purchased “off-the-shelf” from a variety of vendors.

7. Enhancing the Performance of Existing MPT Portfolios

Dynamic Investments can easily be used as building blocks in the MPT-based portfolios that virtually all investors hold today. They both increase performance and decrease risk. Thus, the benefits of DIs can be realized by both advisors and individuals without significant disruption to current investing activities.

8. Enabling the Creation of a Universal Portfolio

The Dynamic Portfolio illustrated by a diagram above on this page is the market’s first Universal Portfolio. It can be profitably and safely used by investors of all risk levels. Why? Because it has the universal goal of maximizing returns while minimizing risk in all economic conditions and in both Bear and Bull markets. And changes are made via the DIs’ built-in trading system that signals trades based on a periodic sampling of market trends. As a result, this portfolio can be seen as a portfolio consumer product and sold “off-the-shelf” by a variety of vendors; or individuals can implement it on their own using an online broker and support from the NAOI. DIT enables the “productization of investing”, a benefit discussed in Point 7 of the list that follows, below.

Extensive testing shows that the Universal Portfolio outperforms virtually any MPT portfolio over any 10-year period with lower risk. Annual returns of 20%+ are not uncommon and losses in any year, including years that include major crashes, are rare. The NAOI suggest that our students use this as a starter portfolio, or as the Core portion of a larger portfolio. The Universal Portfolio also opens new markets that are not well served today by the financial services industry - including a massive market consisting of less-affluent individuals who are not even approached by financial advisors today.

The Top Benefits of using DIs for Investing Professionals

The benefits of using DIT and DIs for professionals are amazing and too large too significant to ignore. The list below shows just a few. Each will give advisors and financial organizations that use and offer them a massive competitive advantage in a crowded market.

1. Offering Superior Products

Dynamic Investments and Dynamic Portfolios can produce returns that are consistently higher than MPT portfolios in all market conditions and with lower risk. It is not uncommon for DIs to average annual returns of 20%+ over an extended time period. Traditional MPT portfolios, even in the most bullish markets, struggle to earn 7%-10% per year and with higher risk. Financial organizations that offer higher-return, lower-risk DI-based products will attract more clients and increase revenues. It’s just that simple.

2. Growing Your Client Base

The NAOI created Dynamic Investments to give individuals investors the confidence they need to enter the market. The fact that DIs provide higher returns than MPT portfolios with lower risk and absolute protection from market crashes will bring thousands, if not millions, of people into the market who are now on the sidelines in fear. While individuals can implement and manage DIs on their own using an online broker, the NAOI knows that most would prefer to work with a financial advisor that offers them. Advisors who integrate DIs into their product offerings will see the size of their client-prospect market grow substantially.

3. Gaining a Massive Competitive Advantage in a Crowded Field

NAOI students tell us that today all investment advisors and financial organizations look alike to them; none holds an obvious competitive advantage. This perception changes with the introduction of Dynamic Investments. Organizations that offer high performing DIs and Dynamic Portfolios will stand out in a crowded field and own a major competitive advantage in the crowded field of financial services. Individual investors in large numbers will seek them out.

4. Opening New Revenue Streams without Disrupting Existing Ones

The NAOI does NOT advocate abandoning MPT portfolio and methods and replacing them with DIT-based products. DIs can be used as building blocks in traditional MPT portfolios; making them market-sensitive and capable of producing higher returns with lower risk. Used in this manner, DIs open new revenue streams without disrupting those currently in place.

5. Making New Product Creation Significantly Easier

Creating new mutual funds and ETFs is a time-consuming and expensive process. In contrast, DIs are created by simply combining existing ETFs in the DI structure . By embracing this new approach, investment developers can easily double or triple the size of their product line virtually overnight with superior products that will be much in demand by both institutional and public investors. The NAOI offers DI Design Classes.

6. Monetizing ETF Combinations - Uncover Hidden Value in Existing Product Lines

DIs monetizing the combination of existing ETFs. By doing so, massive value that is lying dormant in current ETF product lines is uncovered. By simply combining existing ETFs in the DI structure an entire new product-line of superior investments can be created virtually overnight with minimal time, effort and expense.

7. Enabling the Productization of Investing

DIT methods create portfolios that can be marketed the same as consumer products. Each Dynamic Investment specified the ETFs to work with and has an automated trading plan built in that signals trades based on periodic observations of market data. No subjective human judgments are required for DIs to produce returns that are significantly higher than MPT portfolios with lower risk in all economic conditions. This means that management can easily be computerized. As a result, investors can buy and hold DIs that safely meet their goals for the long-term, confident that their investment is constantly monitoring the market to capture gains and avoid losses. The “productization of investing” is seen by many as the Holy Grail of the financial world that experts have been seeking for decades. They haven’t found it - the NAOI has; and now so have you.

More Than a “Good Idea”

DIT and DIs are more than just an interesting theory. The NAOI has been teaching their use throughout our extensive education system for 3+ years. Students who have learned about them and are using DIs in their investing activities tell us that this is finally the approach to investing that will enable them to enter the market with confidence and without fear; and they will search for advisors that offer it. When it is released to the public the NAOI expects to demand to grow fast. Investing organizations who read the White Paper mentioned just below and take action based on what they read will be fully prepared to capture this demand and hold a major competitive advantage over those that remain stuck in the “MPT box”.

The NAOI White Paper

The information presented above is just a sampling of the benefits that result from the the introduction of DIT and DIs to the market. To learn the details of how this new approach works and how you can begin using NAOI-designed DIs immediately read the NAOI White Paper that can be accessed at this link.