It is NOT the intention of the NAOI to advocate that MPT-based portfolios be replaced with Dynamic Investments, although they can be. The disruption to current operations in the financial world would be just too great. Fortunately, MPT and DIT methods work quite well together in the form of Dynamic Portfolios. This page provides a short overview of how. Much more detailed information related to Dynamic Portfolios is found in the NAOI White Paper along with example designs that readers can use immediately.

A Simple Dynamic-Portfolio Template

The diagram presented below shows the configuration of a generic NAOI Dynamic Portfolio (DPort). The DIT Segment uses an automated buy-and-sell strategy based on periodic observations of market trends. The MPT Segment uses a buy-and-hold strategy and can be populated by the MPT portfolios that advisors design today. Or it can simply hold a Total Stock ETF with 60% allocation and a Total Bond ETF with 40% allocation. DPort designers can determine the percentage of money allocated to each Segment

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Example Performance of a DPort

To give you an idea of the type of performance that DIs can produce, let’s look at the simplest possible DPort configuration in which the Dynamic Investment used rotates only between a Total Stock ETFs and a Total Bond ETF based on a quarterly review of the price trend of each. It will hold only one ETF at a time - the one trending up most strongly. The MPT Segment will use the same ETFs as the DI but will hold both at all times with a 60% allocation of the Segment’s money to the Stock ETF and a 40% allocation to the Bond ETF.

Let’s further assume that each Segment is assigned 50% of the total portfolio’s money. Thus, when Stocks are moving up, the total DPort will have an 80% allocation to Stocks and a 30% allocation to Bonds. When Bonds are trending up, the allocation will be 70% Bonds and 30% Stocks. And these allocations are automatic. Below is its performance from 2008 to 2020:

 
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This level of returns is impossible using a generic 60/40, buy-and-hold MPT portfolio for this time period that included two major market crashes and multiple market corrections. This performance is only possible using portfolios that are sensitive to market trends and capable of making automatically changing their holdings, or allocations to their holdings, based on market trends. And look at the Sharpe Ratio. It showed that the higher returns came with lower risk - and no subjective human trade judgments were used!

Four Diversification Elements!

A major reason why NAOI Dynamic Portfolios produce higher returns high returns with lower risk is that they take advantage of FOUR diversification elements instead of the TWO used by today’s MPT portfolios today. They are as follows:

  • Company Diversification: By holding only Exchange Traded Funds (ETFs) that contain a basked of stocks or bonds - used by MPT and DIT portfolios

  • Asset Diversification: By holding both Stocks and Bonds at all times - used by MPT and DIT portfolios

  • Time Diversification: Resulting from DIT Segment changing the ETFs it holds based on a periodic review of the ETFs it works with - used by DIT only

  • Methodology Diversification: Dynamic Portfolios hold bot a DIT Segment that uses a buy-and-sell methodology and an MPT Segment that uses a buy-and-hold methodology - used by DIT only

It should be noted that the diversification elements used by MPT portfolios reduce risk but also reduce returns. Those used only by DIT portfolios reduce risk and enhance returns!

Adding “Market Sensitivity” to Current MPT-Based Product Offerings

The above DPort is one created by the NAOI and you can see how effective it is. But advisors can also add “market-sensitivity” to any portfolio that they create by simply dropping a Dynamic Investment into it as a building block as illustrated in the diagram below. The level of market sensitivity will depend on the allocation of money to the DI building block. In this manner, financial organizations can boost the performance and lower the risk of their entire current product line!

 
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Reading the NAOI White Paper shows how this major upgrade to an existing product line can be accomplished easily, quickly and cost effectively.

The World of Investing Has Just Evolved

The use of 4 Diversification elements in by NAOI Dynamic Portfolios enables them to produce far higher returns, with significantly lower risk, than MPT-portfolios that use only two diversification elements. This is a major evolutionary change to the world of investing.