Is Dynamic Investment Theory for Real?
On this site I describe a fundamentally new approach to investing called Dynamic Investment Theory (DIT) and the new investment type that DIT creates called Dynamic Investments (DIs). DIs produce returns that today's financial experts will say are impossible. And skeptics are coming out of the woodwork.
As a trained scientist I would be skeptical, myself, of the claims that are made on this site. When reading that DIs are capable of consistently producing returns that are multiple times higher than traditional MPT portfolios with less risk and no active management, my first reaction would be: "What kind of scam this is?"
So it is my task on this page to address the skepticism that I deal with virtually every day related to DIs and to convince you that the results shown and the claims made on this site are real. To be credible, I must show to you that these results are based on a solid foundation of logic, statistically significant empirical observations and the use of scientific methods in the DIT development process. I need to demonstrate to you this is not a scam or a trading system but rather a fundamental change in how we invest today that has worked in the past, works today and will continue to work in the future.
Any site that claims to have made this type of change in the art and science of investing must have a page like this. If it doesn't, its probably because it can't. Let's begin.
Why People Are Skeptical
First, let's look at why Dynamic Investment performance brings out the skeptic in people. I presented the below performance table first on the home page of this site. The performance data presented for the NAOI Basic Dynamic Investment, shown on the top row seems too good to be true. Let's look at it again. Shown on the top row are yearly returns of the DI for the past 10 years along with the Average Annual Return and Sharpe Ratio - a measure of how much return is gained for each unit of risk take. The bottom data row shows the same information for a standard portfolio created using standard Modern Portfolio Theory (MPT) methods with the allocations shown. You can see that the DI returns are "off-the-charts" superior.
These DI returns are like nothing we have ever seen in the world of investing. That is why I am constantly assaulted with questions and doubt similar to the ones I present below on this page.
Performance Like This Is Impossible!
The only way to get a performance leap such as that shown by the DI in the table is by changing the fundamental level way we invest today. MPT designed portfolios can't produce returns like these. But DIT designed investments can. A major problem with current investing methods is that MPT methods were introduced in 1952 when markets were a far different place. Markets have evolved significantly since then but MPT hasn't changed at all; and it no longer works in today's markets.
DIT was designed by the NAOI to not only work in modern markets but to take full advantage of their volatility. While MPT insists that a portfolio own both winning and losing equities at all times, DIT is designed to hold ONLY winning equities while avoiding losing equities. This is done through the use of a new diversification element called Time-Diversification provided by a buy-and-sell strategy.
What About the Tax Issues of Trading?
Skeptics tell me that NAOI Dynamic Investments won't work because the frequency of trading triggers short-term capitol gains taxes that nullify any gains earned by trading. But this is false for the following two reasons.
DI Gains Dwarf Additional Taxes. The performance of DIs using a buy-and-sell strategy is so superior to that of static, buy-and-hold MPT portfolios that the marginally higher taxes related to short-term gains are dwarfed by the higher returns generated by DIs. Even after short-term gains taxes are deducted, DI returns beat MPT portfolio returns every time - and not by just a small amount. For proof of this refer again to the table at the top of this page.
Investing in Tax-Deferred Accounts. Most investing by the public today is done in tax-deferred accounts, such as IRA's and 401(k) Plans. in such accounts, gains are are taxed at personal income rates when money is withdrawn at time of retirement. Thus for the majority of individual investors there is no tax penalty for the short-term trading used by Dynamic Investments. In fact, the full power of retirement plans is not exploited unless an investor does buy and sell equities to take advantage of market movements as there is no tax penalty for doing so.
Taxes are NOT a reason to forego the benefits of using NAOI Dynamic Investments. It's not even close.
Isn't Frequent Trading Is A Bad Idea?
We have been taught for decades that no one is smart enough to "time" the market in order to make successful trades. Here's why this argument is true but moot in the world of Dynamic Investments:
Humans Can't Time Markets - But "Markets" Can. It is true that frequent trading by human analysts is usually not a good thing. There are just too many variables to work with. But with DIs, humans don't make the trading decisions - the "market" does. And virtually everything known about an equity is factored into an investment's price and trend. Testing and empirical observations show that "the market" is a lot smarter and far more successful at predicting future market price movements than any one, or group, of human analysts. So, yes, DIs can effectively "time" the market while the NAOI agrees that humans can't.
Additional Trading Costs. And, of course, some will try to say that the trading costs involved with the buy-and-sell strategy used by DIs are excessive. Maybe back in the day when advisors charged $75 per trade this argument had some validity. Today, using an online broker, trades cost about $7 each. And using Dynamic Investments trades are rare. For the NAOI Basic DI illustrated in the table above that earned 30% + per year from 2007 to 2016, there were only, on average, a little over 4 trades per year (a buy and a sell for each time the ETF was changed). Using an online broker this would cost about $30 per year - an insignificant amount compared to the resulting superior returns.
The utter disdain that the financial services industry has today for a buy-and-sell strategy is based on thinking from the 1950's when MPT was introduced. Modern tools make buying-and-selling not only easy and inexpensive but also essential to take full advantage of the gains that are available in today's volatile markets.
Why Has MPT Lasted for 65+ Years?
Modern Portfolio Theory has been the "settled science" approach for portfolio design since 1952. If it is such a disaster why has it survived so long?
In my opinion it is not because MPT is the best approach available. Rather, it is because it forms the foundation of a multi-billion dollar financial services industry. The MPT approach is so confusing, filled with variables and rife with subjective human judgments that individuals can't navigate the world of investing on their own. Thus, they have little option but to just buy what their advisors recommend without question and hope for the best. And this makes today's MPT-based financial industry very rich.
On this site I am suggesting that the industry's MPT "goose that laid the golden egg" be replaced with DIT that is far easier for individuals to work with and decreases dependency on financial advisors. As a result, many organizations will ridicule what they read on this site.
Due to the fact that even the simplest Dynamic Investment, as illustrated at the top of this page, outperforms the most sophisticated MPT portfolios, the skeptics will attack this superior approach with all they have. (See the quote at right.) And these attacks will be based primarily on selfish reasons.
I am more than willing to debate any skeptics of the Dynamic Investment approach at any time, in at any venue and in any format. I have the empirical data to back up my claims. Let's let an audience decide who is right. If any one wants to set up such a debate, contact me at LHevner@naoi.org.