Updating and Advancing the World of Investing
To empower individuals to invest with confidence Education is key. But there are times when education is not sufficient. Teaching students how to use industry standard portfolio design methods that are outdated provides no benefits. Unfortunately that is where we are today. Virtually all portfolios are designed using Modern Portfolio Theory, an approach introduced in 1952 and this approach can’t cope with modern, more volatile, markets.
Thus, education must be supplemented with innovation. Investing products and services must evolve with markets. The NAOI is a market leader in not only identifying when change is needed but what these changes should look like. Then our Research Division designs and creates them by “thinking differently”, unconstrained by today’s industry-standard products and methods. This pages in this submenu show NAOI innovation in action.
The Current Problem
Based on over two decades of working with the investing public, the NAOI knows that the financial services industry today is not meeting the needs of individual investors. As a result millions of average people with money to investing are sitting on the market sidelines in fear or, if they are in the market, studies have shown that they are investing far too conservatively. This is bad for both individual investors and for advisors / financial organizations.
The current problem that causes many individual to just deposit their money in the bank results from the exclusive use by financial organizations today of Modern Portfolio Theory (MPT) to design portfolios. MPT was introduced in 1952 when markets were a far different place. While markets have changed significantly since then, MPT has barely changed at all. MPT designs produce static, buy and hold portfolios to try to cope with modern markets and they simply can’t cope. We say this clearly during the market crash of 2008-2009 when too many people holding MPT-based portfolios lost a significant portion of their wealth, got out of the market in disgust and never returned.
The Innovative Change Needed - Dynamic Investment Theory
The NAOI taught MPT portfolio design methods for over a decade beginning in 1997. We showed our students how to create portfolios customized to meet the risk tolerance of each investor using asset allocation methods. Then we went along with the industry in suggesting that these portfolios simply be bought and held for the long term. When the markets crashed in 2008-2009 we watched in dismay as the portfolios of our students crashed with it. At that point I, Leland Hevner, stopped all education activities and refocused NAOI resources on a research effort to find an alternative approach to MPT, one that works in modern markets.
Following a multi-year R&D effort we found it in the form of Dynamic Investment Theory (DIT) and in the design of a new investment type that DIT defines called NAOI Dynamic Investments (DIs). This is the first new approach to investing since MPT was introduced in 1952. And as the following chart shows, it is long overdue.
Change Is Inevitable
The above chart shows that the financial services industry has gotten lazy and unfortunately happy with the MPT status quo. After all financial organizations are profiting quite nicely from the continued use of MPT. But the the unquestioned use of MPT to design portfolios has a short life span. It is not meeting the needs of the investing market.
But MPT will continue to be the industry standard until something takes its place. Well, that “something” is DIT that you will learn about via the links provided below. The investing public will drive innovation in the way we invest, even if the industry resists it.
An overview of Dynamic Investment Theory is found at this link and Dynamic Investments are discussed at this link.