Executive Summary

Welcome to a Web page that shows how the National Association of Online Investors (NAOI) is changing how investing works at a fundamental level in order to better meet the needs of the investing public and to also increase revenues for the financial services industry.

This change comes in the form of a new approach to portfolio design and management called Dynamic Investment Theory (DIT) and the innovative investment type it creates called Dynamic Investments (DIs). On this Web page you will learn why this new approach was created, how it works and how both investment buyers and sellers will benefit greatly from its introduction. Here you will also learn how a cooperative agreement with the NAOI will enable your organization to take full advantage of this change quickly and cost-effectively.

What are NAOI Dynamic Investments?

Developed by the NAOI based on a multi-year R&D project using extensive input from the investing public, DIs are capable of changing the equities they hold based on a periodic sampling of market trend data. By doing so, they are capable of producing returns that MPT, asset-allocation portfolios can’t touch with lower risk and absolute protection from market crashes.

Why Demand for Dynamic Investments Will Grow

What you learn here will soon (currently scheduled for third quarter, 2020) be taught by the NAOI to thousands of individual investors nationwide via our extensive education channels and also via a DI User’s Manual (shown at the bottom of this page) that will be available on Amazon where it can reach millions of investors.

When people with money to invest learn about DIs and their simplicity combined with superior performance, demand for them will grow. Advisors and financial organizations that include this innovative investment type in their product offerings will have a massive competitive advantage over those that don’t.

“The Future of Investing Starts Here” is a Registered Trademark of the NAOI.

Introductions

Hello. My name is Leland Hevner. I am the President and founder of the National Association of Online Investors (NAOI) an organization I founded in 1997 with the mission of empowering individuals to invest with confidence via objective education and the use of online resources. Thousands of individuals have taken our online courses, read our published books and/or attended our college classes. As a result, we are a major influencer of how the public invests today.

This Web page introduces an updated approach to portfolio design and management called Dynamic Investment Theory (DIT) and an innovative investment type that DIT creates called Dynamic Investments (DIs). DIs solve many of the problems that the investing public faces today. They enable investors to take full advantage of uptrending markets while avoiding down-trending markets and crashes. By doing so, the use of DIs will bring millions of individuals into the market who are now on the sidelines in fear of how investing works today.

This new investing approach is not just theory or an academic exercise.

The NAOI has been teaching the use of Dynamic Investments to student focus groups since early 2016. Those who have included DIs in their portfolios tell that their returns have increased significantly above the advisor-recommended MPT portfolios they have held for years. And they are less stressed by the investing process, knowing that their DIs are constantly monitoring the market and automatically signaling trades to both capture gains and avoid significant losses.

The Planned Release

The NAOI is planning a nationwide release of this approach to the public and to the financial services industry in Quarter 3 of 2020. When we do, the demand for DIs will be high. The information presented on this page gives you a pre-release look at how Dynamic Investments work and are used, enabling you to get ahead of the demand curve by beginning to plan for offering Dynamic Investments now.

Why Change Is Needed

As a leading provider of personal investing education to the investing public, the NAOI interacts with individual investors on an almost daily basis. We teach them, but they also they teach us. What we are learning from average people with money to invest is alarming. Individuals are leaving the market in ever-increasing numbers. Many left following stock market crash of 2008-2009 when those lost a significant portion of their savings and more will inevitably leave during, or following, the current corona virus crash.

NAOI interviews with individuals who have left the market show that at the core of the problem is the unquestioned use of today’s industry-standard approach to portfolio design called Modern Portfolio Theory (MPT). Introduced to the market in the 1950’s when markets were a far different place, MPT dictates that portfolios be designed to match the risk tolerance of each investor and then they are to be held for the long-term, through all economic conditions. There is no alternative approach offered to individual investors by the financial services industry today.

A major problem with MPT portfolios is that by using a buy-and-hold management strategy that gives them no sensitivity to market movements. This makes them dangerously vulnerable to market crashes that occur on average of about every 6 years. Thus, investors can expect to lose a significant portion of their portfolio value on a regular basis and it can take months or years to recover these losses. Yet, after each crash and resultant portfolio losses, financial advisors offer to clients the same static MPT portfolios that people know will fail again in the not too distant future. Is it any wonder, then, that many are leaving or avoiding the market in significant numbers?

To retain current clients and to entice more people into the market the financial services industry needs to fundamentally change the products and services they offer. Years of research and development by the NAOI have shown us what these changes will look like. They are described below.

The Change Needed

From our inception in 1997, the NAOI taught MPT methods for portfolio design and management - there were no options. But after watching these portfolios melt-down during the subprime mortgage crash of 2008-2009, I stopped all NAOI education classes and opened the NAOI Research and Development Division to find an alternative approach to MPT; one designed to work in modern markets.

Following a multi-year R&D effort, using extensive input from the investing public and strict scientific methods, we found the MPT alternative needed in the form of Dynamic Investment Theory (DIT). This approach creates a new investment type called Dynamic Investments (DIs) that are capable of automatically changing the equities they hold based on a periodic sampling of market price trends. Extensive testing of DIs shows that this simple investment type is capable of producing returns that are significantly higher than traditional MPT portfolios with lower risk in all market conditions. And DIs are so simple to understand, implement and manage that individuals can take advantage of them either in conjunction with an advisor or by working on their own using an online broker.

NAOI students who have included DIs in their portfolios for the past several years tell us that this dynamic approach to investing is what they needed to enter, or re-enter, the market with confidence and without fear.

How the NAOI Dynamic Approach to Investing Works

Presented below is an overview of how DIT and DIs work. Links are provided to other pages on this site where more details for each topic can be found. The book pictured at right is the “bible” for this new approach. It can be purchased in the NAOI Store at this link. This book along with a cooperative agreement with the NAOI in the from of a Partnership or a Consulting Contract, as discussed below on this page, will enable your organization to take full advantage of this dynamic approach to investing almost immediately.

Thinking Differently: Dynamic Investment Theory (DIT)

DIT sets the logic and rules for the creation of an unlimited number of Dynamic Investments (DIs) for a full spectrum of investing goals. To meet the goals of individual investors for a simple investing approach with higher returns, lower risk and absolute protection from market crashes, the NAOI needed to approach the investing process from a different angle; thinking differently and stepping outside of the MPT “box”.

Significant research showed that to develop the new approach required, we needed to make the following fundamental changes to how portfolios are designed and managed today:

1. A Better Portfolio Goal. Today’s MPT portfolios are designed to match a “guesstimate” of each investor’s risk profile. This means that each portfolio must be customized and an error made in an individual’s risk assessment can have devastating consequences for their ability to create wealth. A better portfolio goal would be to maximize returns and minimize risk in all economic conditions. This is a universal goal that works for all investors and the need for customization, and its associated risks, goes away.

2. A Buy-and-Sell Management Strategy. MPT portfolios are meant to be held for the long-term regardless of market price movements. Their use of a buy-and-hold management strategy makes them dangerously vulnerable to market crashes. A better management strategy would use a buy-and-sell strategy that makes portfolios market-sensitive and capable of detecting and buying into market price uptrends and avoiding market price downtrends and crashes.

3. A Built-In, Objective Trading Plan. MPT provides no guidance for making changes to a portfolio once designed other then, perhaps, a periodic rebalancing. MPT portfolio equity purchases and trades are thus based on subjective judgments and this injects a massive “human-risk” element into the investing process. A better approach would be to have built-in to each DI a standardized trading plan that signals trades based on objective observations of empirical market data. This change is critical and is discussed in more detail just below.

4. Eliminating the “Human-Risk”. To eliminate, or to at least dramatically reduce, the risks related to subjective human judgments in today’s portfolio design and management process, the NAOI needed to base equity trades on objective observations of market data. For this purpose we turned to Quantitative Analysis, a field of study that analyzes historical market data. Here we found that past equity price-trends have remarkable predictive power for future price movements. Hedge-funds have used this observation for decades to produce amazing returns. But the methodology used by professionals has been seen, correctly, as too complex and risky for the investing public. Our task became to make price-trend following methods safe, simple and profitable for individual investors. We have done just that in the design of Dynamic Investments and Dynamic Portfolios as described below.

Following a significant R&D effort, the NAOI created a new approach to investing called Dynamic Investment Theory (DIT) that incorporates all of the fundamental changes listed above and meets all of the goals set for us by the investing public. DIT is discussed in more detail at this link. Dynamic Investments are explained next.

The Anatomy of Dynamic Investments

Based on DIT logic, we designed Dynamic Investments (DIs) to be simple, effective and easy to create and use. I provide a brief overview of their components below. With this design we have met our goal of making enhanced trend-following simple, profitable and safe. This accomplishment is a major step forward in the evolution of investing.

Dynamic Investment Components

An unlimited number of Dynamic Investments can be created using DIT methods to meet a full spectrum of investing goals. But regardless of the goal targeted, all DIs have the same components and structure as illustrated in this diagram.

The purpose of each DI component is explained below:

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 ETFs in the DEP are ranked 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 Reviews.

Each of these components is a variable that is defined by a DI designer to meet specific investing goals. The NAOI teaches classes on the art and science of DI design and also offers a catalog of optimized Dynamic Investments for a full range of investing goals as discussed at this link.

More information on DIs is found at this link.

The Performance of a Simple Dynamic Investment, 2008-2019

The table below shows the historical performance of an extremely simple DI that holds only a Total Stock Market ETF and a Total Bond Market ETF in its Dynamic Equity Pool. 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. Shown are the Compounded Annual Returns for the DI compared to those of a generic 60% Stock / 40% Bond, buy-and-hold MPT portfolio. Average annual returns and the Sharpe Ratio for the entire period are shown in the bottom two rows.

During this period, the Dynamic Investment held the Stock ETF for 1945 days and the Bond ETF for 1076 days. Trades were signaled by the DI based on objective observations of empirical market data, with no human judgments involved.

Note that the DI made exceptional gains during the market crash of 2008-2009 by switching its holding from the Stock ETF to Bond ETF and then back to Stocks when the market recovery began. The “static” MPT portfolio that held both the Stock ETF and the Bond ETF for the entire time period suffered major losses during this crash, and because it held a significant allocation to Bonds during the following bull market, it did not take full advantage of stock market gains. You can see that the DI increased in value in BOTH the bear market and the following bull market with relatively low risk and it did so automatically with no active management needed. This DI is also protecting its value now, as these words are written, in the current corona virus crash.

Dynamic Portfolios: The Investment Vehicle Recommended to NAOI Students

While a single DI, such as the one used in the example above, can be the only investment in a portfolio, the NAOI knows that allocating 100% of an investor’s money to one ETF at a time is too big of a leap-of-faith to be accepted today by either individuals or financial professionals. So, the we have created an innovative investment vehicle that we call Dynamic Portfolios. These are traditional MPT portfolios that contain one or more DIs as building blocks.

The illustration below shows a “hybrid” DIT/MPT portfolio that hold both a DIT buy-and-sell Segment as well as an MPT buy-and-hold Segment with the allocations shown. This is the type of portfolio configuration that the NAOI recommends to our students.

This simple Dynamic Portfolio, for the test period from the start of 2008 to the end of 2019, earned an average annual return of +17.7% with a Sharpe Ratio of 1.17. You can see that while this configuration averaged a lower return than the DI in the example discussed just above, its risk was significantly lower as evidenced by the higher Sharpe Ratio. And we found that by holding at least two non-correlated ETFs at all times, both individual investors and investment advisors were comfortable with this portfolio configuration.

A “Market-Biased” Portfolio - The Perfect Portfolio for Retirement Accounts

The NAOI refers to above configuration as the NAOI Market-Biased Portfolio. The following diagrams show why. Keep in mind that the DI purchases and holds for one Review-Period either a Total Stock or a Total Bond ETF depending on which is trending up in price most strongly.

Portfolio Allocation when Stocks are Trending Up:

Portfolio Allocation when Bonds are Trending Up:

You can see that this portfolio will always be automatically “biased” toward the asset class that is trending up in price at the time of a review – typically quarterly. And because Stocks and Bonds tend to move up and down at different times, this portfolio is designed to increase in value at all times regardless of economic conditions; even during stock market crashes. Always keep in mind two things:

1. This portfolio uses Trailing Stop Loss (TSL) orders to stop major value loss during the short time it is held between Review events. TSL orders are typically triggered when major trends begin to reverse themselves during a DI holding period - for example when the market begins to crash. When a TSL is triggered, the DI is typically out of the market and in Cash until the next Review period when, again, the ETF in the DEP that is trending up in price most strongly is purchased. Remember, there are no human subjective decisions involved.

2. Trade signals are generated based on objective observations of the market trends of each ETF in the portfolio, not based on subjective human judgments. As a result the portfolio management process can be totally automated.

Many NAOI students are using this portfolio type in their retirement plans and seeing returns that far exceed those of their family, friends and fellow workers who are holding traditional MPT portfolios. And they are doing so with far less stress!

A Non-Disruptive Portfolio Design Approach

The NAOI has been warned by skeptics that the changes we are advocating are simply to great for the financial industry to accept. But this is not true. The MPT Segment of a Dynamic Portfolio can be the portfolio that an advisor creates using their current products and methods as illustrated below.

The addition of a Dynamic Investment makes the traditional MPT portfolio market-sensitive and capable of both increasing returns and reducing risk in all market conditions as discussed above. As a result, advisors and financial organizations can easily take advantage of DI benefits without disrupting the methods and products they are using today!

The level of sensitivity that an NAOI Hybrid Portfolio has to market price movements is determined by the % allocation of money assigned to the Dynamic Investment. And experience tells us that the higher this allocation is, the better the portfolio will perform.

Click here for more information related to Dynamic Portfolios.

FOUR Portfolio Diversification Factors

It is not hard to see why NAOI Dynamic Portfolios product returns that are higher than traditional MPT portfolios and with lower risk. MPT portfolios use only two diversification factors, Dynamic Portfolios use four. Here they are:

1. Company Diversification - via the use of ETFs (used by MPT and DIT)

2. Asset Diversification - by working with multiple asset classes (used by MPT and DIT)

3. Time Diversification - due to the DI’s periodic reviews and potential changes in the equities held (DIT only)

4. Method Diversification - by using both MPT buy-and-hold methods and DIT buy-and-sell methods (DIT only)

It should be noted that the first two diversification elements listed above, used by both MPT and DIT reduce risk but also reduce returns. Diversification elements 3 and 4 not only reduce risk but also enhance returns!

The use of four diversification elements in a portfolio is truly an evolutionary step forward in the world of investing.

The Benefits of Using Dynamic Investments

You have seen above, individual investors will benefit from the amazing performance Dynamic Investments. But there are other benefits of using DIs that are equally valuable for BOTH individual investors and investing professionals. Listed below are just a few benefits for each. More are found on this Web site by clicking the links provided.

Top Benefits of using DIs for Individual Investors

• A simple, logical approach to investing that people can understand without extensive education

• Higher returns with lower risk than MPT portfolios in all economic conditions

• Absolute protection from market crashes resulting in lower investing stress levels

• By basing trading decisions on objective observations of market data, DIs eliminate a massive area of human-risk that investors must contend with today.

Click for more: Benefits for Individual Investors

Top Benefits of using DIs for Investing Professionals

• DIs enable financial organizations to easily create and offer innovative, higher-performance investment products that will attract new clients and open significant new revenue streams.

• DIs monetize ETF combinations and by doing so, uncovering massive hidden value in existing ETF product lines that is now lying dormant.

• The DIT approach to investing opens a vast area of new product research and development - more information is found here

Click for more: Benefits for Investing Professionals

There Will Be Skeptics

As you read the information on this page, you may have doubts. I know I would if reading it for the first time. An entire chapter in the “Introduction to Dynamic Investments and Market Sensitive Portfolios” book, found in the NAOI Store, is dedicated to addressing these doubts. Below are the top three reasons why people tell us that DIs can’t possibly work and a summary of our response to each:

1. The use of DIT methods will result in short-term capital gains taxes. Yes, the DIT buy-and-sell strategy will result in holding equities for less than a year, resulting in short-term capital gains taxes. There are two reasons why this is not a problem. First, most investing done by the public today is in retirement accounts in which gains are not taxed until money is withdrawn, starting a age 59 1/2, and then at personal income tax rates. Second, the significantly higher returns produced by DIs and DPorts, as illustrated in the examples above, more than make up for any additional taxes.

2. It is impossible to time the market. The use of trend-following methods can be seen as “timing the market” and experts will correctly say that you can’t time the market with any degree of accuracy. But DIT doesn’t ask you to. DIT makes trades based on observations of historical price trends. And extensive testing shows that past price trends have remarkable predictive power for future price movements, at least in the short term. The NAOI has developed a safe, profitable way to take advantage of this empirical observation. It is true that YOU cannot time the market, but the MARKET, itself, can.

3. The financial industry will not accept a change this big. The financial services industry does not accept fundamental changes easily and many in this arena will oppose those suggested here. There are two responses to this objection. First, the change is not huge when DIs are simply used as building-blocks in traditional MPT portfolios. Second, DIT creates investment products that are so superior in performance to MPT portfolios that financial organizations that offer them will have a massive competitive advantage over those that don’t.

There will always be skeptics, doubters and those resistant to change. But consumer demand for the superior performance of Dynamic Investment and Dynamic Portfolios in a competitive marketplace will force financial organizations to accept and offer them in order to survive.

The Basic DIT/DI Books

Below are the seminal books that will teach both buyers and sellers about Dynamic Investment Theory and Dynamic Investments. They are each only about 70 pages long and very easy to read and understand. Key to the success of this new approach is that it be simple to use by individual investors and simple to implement and manage by investing professionals. The book for professionals is available for purchase now in the NAOI Store. The User’s Manual shown below, at right, will be available in Quarter 3 of 2020 as a part of our nationwide release effort.

NAOI Partnerships

According to a recent CFA Institute Survey, only 23% of individual investors trust their financial advisors. The NAOI is known and well-respected throughout the investing world as a strong advocate for the individual investor. A Partnerships with us can provide a significant boost to an organization’s trust level in the eyes of the investing public. Multiple types of Partnerships are discussed below and they can be combined. Of course the NAOI does not accept Partnerships without significant due diligence performed by both parties.

Referrals: As just one benefit of any NAOI Partnership type, we will make known to our students the names of advisors and organizations that offer the types of products and methods I have discussed on this Web page. After taking our classes and/or reading our books, NAOI students will want to work with you.

Strategic Partnerships

The NAOI is unsurpassed in our understanding of the investing public. Based on 20+ years of teaching and working with individual investors, we know what they want and need from the financial services industry to enable them to participate in the market with confidence and without fear. This is incredibly valuable and actionable information that we are willing to share with our Partners to use immediately as input to their strategic planning efforts.

We can also make available to Strategic Partners a massive investor education knowledge base and proprietary financial planning calculator set that can be used to quickly create customized education material that both supplements and supports our Partner’s products and services. Input from our students has shown us time and time again that investment products and services become much more attractive to buyers when accompanied by education material.

Research and Development Partnerships

The arena of new investment research and development today is crowded. Creating products such as new mutual funds and unique ETFs is becoming more expensive and less productive. And very few new developments change the fundamental way we invest; they simply “tweak” it and as such are of little interest to the investing public. The problem is that investment R&D has been confined for decades within the MPT “box”. Virtually no developer challenges the use of this seven decades-old approach to portfolio design and management.

As you have read on this page, DIT does challenge the MPT approach and by doing so opens a vast and virgin field of more effective and profitable product development. This change is so significant that it will require the financial world to rethink even the most basic and universally accepted concepts of how investing works today. These are areas of research that are suitable for Doctoral Theses and unique Strategic Business Plans.

The NAOI is looking for Development Partners to help us exploit the massive potential of this new approach. And this offer is made first to individuals who were invited to access this Web page. Financial organizations seeking to expand their product lines, increase their market share, open new revenue streams and gain a massive competitive advantage in a crowded field need look no further than an NAOI Partnership. More information is found at this link.

If you are interested in an NAOI Partnership, contact me personally at LHevner@naoi.org to discuss.

NAOI Education Classes and Consulting

Education. Dynamic Investments are easy to create and implement. The NAOI designed them specifically to be that way. But creating optimal DIs that produce the highest returns with the least amount of risk in virtually all economic conditions requires additional training. To gain an in-depth understanding of DIs and DI portfolios and to master the art and science of DI design, the NAOI offers advanced DI Education and Design Classes and Seminars as discussed at this link.

Consulting. The NAOI also offers Consulting Services that show financial organizations how to use DIT methods, Dynamic Investments and Dynamic Portfolios to capture market share, increase revenues and meet their unique goals. Here are several examples:

• For ETF Developers and Vendors: If your organization develops or offers ETFs we can show you how to combine them in DIs that produce significantly higher returns with lower risk than any standalone ETF or MPT portfolio in existence today. By doing so, the use of DIs uncovers massive value that is currently “hidden” in your existing ETF product line.

• For Portfolio Strategists and Designers: If your organization designs and/or manages portfolios we will show you how your job just got a whole lot simpler and your portfolios a whole lot more profitable and less risk via the use of Dynamic Investments. DIs enable portfolio solutions that will outperform any MPT-based portfolio in existence today. We can show you how.

• For Financial Advisors: Dynamic Investments give you the tools needed to provide clients with higher return, lower risk portfolios as discussed above. And because DIs signal trades based on objective observations of market data, they provide the built-in trading plan that your clients want and need to take gains and avoid losses. And you can simply forget about the complexities of periodic portfolio rebalancing - it is automatic. In addition, the use of DIT methods and DIs is so simple and effective that you will spend far less time designing and managing client portfolios. This is time better spent providing financial planning knowledge to your clients; an area of wealth creation that individuals desperately need and will be happy to pay for..

The ROI of an NAOI consulting contract will be off-the-charts high. We guarantee it. More information is found at this link.

Summary and Contact Information

I have presented on this Web page a new approach to investing that the NAOI will begin teaching to thousands of investors in Quarter 3 of 2020. As you can tell, Dynamic Investment Theory and Dynamic Investments are not merely a trading system or fixed set of investing products. This is a comprehensive and evolutionary approach to investing that enables financial professionals to create an almost infinite number of unique and powerful products designed to meet a full spectrum of investing goals.

What you have learned here is an approach to portfolio design and management that will shape the future of investing. Financial advisors and organizations that recognize this first, and begin planning for it now, will profit handsomely. Those who prefer the status quo and resist change, will struggle to survive. That’s just how evolution works.

Please feel free to contact me directly at: LHevner@naoi.org with questions or for more information. And consider joining the NAOI Updates Email List via the form at the bottom of this and each page of this site. I look forward to discussing with you the once-in-a-generation opportunities that now exist and how we can cooperate to meet our common goal of empowering the investor - both individual and institutional. And by doing so to also give your organization a massive competitive advantage in a crowded field.