The Next Step in the Evolution of Investing
NAOI Dynamic Investments (DIs) are created using the logic and rules set forth in Dynamic Investment Theory. DIs have the built-in intelligence to identify and capture the positive returns of asset class and market segment price uptrends wherever and whenever they exist in the market. They are the financial world's first “market-sensitive” investments that can be easily implemented and managed by the investing public. This page provides an overview of how DIs work and the type of performance they can produce. Prepare to be amazed!
The NAOI Dynamic Investment Structure and Components
The following diagram shows the very simple structure and components of all Dynamic Investments. Note that in this discussion Exchange Traded Funds (ETFs) are used as the investing vehicle; Mutual Funds work as well.
These are the components of all Dynamic Investments that make them both “market-sensitive” and “intelligent”:
Dynamic Equity Pool (DEP) - This is where a DI designer places groups of ETFs (or mutual funds) that are “candidates” for purchase by the DI at a Periodic Review event as discussed next.
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 held, until the next Review event.
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.
Trailing Stop Loss Order- A Trailing Stop Loss order is placed on the ETF purchased by the DI to protect its value from sudden and significant price drops during the short time it is held.
Each of these components is a variable that is defined by a DI designer to meet specific investing goals. The NAOI offers training classes for DI Designers as discussed at this link.
Dynamic Investment Management
Dynamic Investments are the market’s first “comprehensive” investment type. They not only specify the equities to work with but also set the rules for how these equities are too be managed on an ongoing basis i.e. a built-in trading plan. The following diagram illustrates how a DI can change the ETF it owns based on a quarterly sampling of the price trends of the ETFs in the Dynamic ETF Pool.
Via this simple management process – which can easily be automated – DIs strive to hold ONLY uptrending equities while selling, or avoiding, those that are trending down. This is in stark contrast to MPT portfolios that are designed to hold both winning and losing equities at all times.
The Amazing Performance of the NAOI Alpha DI
The Table below shows the returns of a Dynamic Investment that has been optimized by an NAOI trained DI Designer. In this DI the Designer has placed ETFs that track three Stock “types” (e.g. small-cap growth, large cap value, dividend producers) along with one Bond type as candidates for the DI to purchase. This gives the DI four areas of the market to search for uptrending ETFs at a quarterly review. The DI only buys (or holds if already owned) the one ETF that is trending up most strongly in price. Note that the Sharpe Ratio in the final column is a measure of how much return is achieved for each unit of risk taken and the higher the better.
Dynamic Investment Performance 2008-2019
During this same period, a traditional 60% Stock / 40% Bond, MPT portfolio earned approximately 7.5% with a Sharpe Ratio of 0.54. You can see that the simple DI that can be implemented and managed by investors of all experience levels, it earned returns that are over to three times higher than the MPT portfolio for the same period and with less than half the risk! It is also worth noting the amazing returns of the DI during 2008, 2009 when the Stock Market crashed.
How Is This Possible?
Today’s financial experts will say that returns like those produced by the DI in the above Table are impossible. And they ARE impossible using MPT methods. But we have moved out of that outdated world into the new world of DIT. Here, performance like this is not uncommon. Here are just a few of the reasons why DIs produce returns that are significantly higher than traditional MPT portfolios with loser risk:
Time-Diversification. By periodically reviewing the price trends of the ETFs in its DEP and making trades if necessary, DIs introduce a new diversification element into the world of investing called “time-diversification”. This diversification element not only reduces risk, it enhances returns. MPT portfolios don’t use time-diversification.
Purchasing Only Uptrending Equities. DIs are designed to purchase only equities that are trending up in price at the time of purchase. In contrast, MPT portfolios must hold both winning and losing investments at all times to reduce risk; but this also reduces returns.
Automatically Stopping Losses. If the ETF purchased by a DI starts to drop in price during the short period of time it is held between Review Periods, it is automatically sold by a Trailing Stop Loss order and the DI is “out of the market” until the next Review Period (less than three months in the future) when it will likely be replaced with an ETF moving up in price. Thus DIs are automatically protected from significant value loss and market crashes.
Objective Trade Decisions. DI trade decisions are made based on objective observations of market price trends, not on subjective judgments. This removes a massive “human-risk” element from the investing process that can cause significant portfolio value loss.
There are other reasons as well. They are discussed in the “Introduction to NAOI Dynamic Investments” book.
The Rise of Dynamic, Market Sensitive Portfolios
While Dynamic Investments can be used as complete portfolios, the NAOI knows that such radical change can be disruptive to the way investing works today. Most of our students are more comfortable using DIs as building blocks in a more traditional MPT portfolio where they will both increase returns AND reduce risk. We call these MPT/DIT Hybrid Portfolios and they are discussed at this link.