The World of Investing Is About to Change at a Fundamental Level
You Will Learn How and Why on this Page
From the President of the NAOI
The National Association of Online Investors (NAOI) is excited to announce the development and imminent release of a next-generation investment type called Dynamic Investments (DIs). Discovered and developed based on a 5+ year research effort by the NAOI, we are confident this investment type will define and dominate the future of investing. On this Overview Page you will learn about how DIs work and why they produce returns that today's MPT portfolios can't touch with lower risk and no active management required. When you understand the significance of this release you will never again view the world of investing in the same way! And I believe you will be excited at the possibilities that have just opened up in the field of investing.
Finally! The field of investing has entered the 21st Century.
Investing Methods Used Today are Dangerous
The NAOI has worked to educate individual investors for over 20 years. We have taught thousands of people the art and science of personal investing. We also interact with hundreds of average people with money to invest on a yearly basis. We know that they are not being well served by the financial services industry today. They find the world of investing so complex and confusing that they see little choice but to entrust their financial futures to financial advisors, accept their recommendations without question and then just hope for the best. And NAOI education can only do so much.
The problem lies much deeper than a lack of education. It lies in the universal use of Modern Portfolio Theory (MPT) to design portfolios today. MPT was introduced in way back in 1952 when markets were a far different place. While markets have evolved, MPT has barely changed at all and it creates portfolios that simply cannot cope with modern markets. This is why people are given portfolios today that provide mediocre returns at best with excessive risk and unreasonably high expenses.
The NAOI has fixed this problem with the development of Dynamic Investment Theory (DIT) and the new investment vehicle it creates called Dynamic Investments (DIs). DIT is at the very least a viable alternative to MPT and at most a complete replacement. It catapults the world of investing from the 1950's where it is "stuck" today, into the 21st Century where it needs to be.
With the introduction of DIT and DIs, the world of investing has evolved.
The Evolution of Investing Timeline:
Here are major events in the history of the stock market that qualify as evolutionary steps in the world of investing:
1952 - Introduction of Modern Portfolio Theory and Asset-Allocation Portfolios
1980 - Introduction of Mutual Funds
1992 - Introduction of Exchange Traded Funds
2017 - Introduction of Dynamic Investment Theory
2018 - Release of Dynamic Investments to the Public
A Stunning Comparison between the Past and the Future of Investing
Below is a short but very revealing comparison between how an MPT portfolio performed for decade period from the start of 2008 to the end of 2017 as compared to the performance of the simplest possible Dynamic Investment (DI) for the same period. Theses two investment vehicles use the same Exchange Traded funds, one for Stocks and one for Bonds. The structure of the vehicle is the difference - the MPT portfolio is "static" while the DI is "dynamic".
The MPT Portfolio Performance and Problem
Modern Portfolio Theory (MPT) instructs us to create portfolios that match the risk tolerance of each investor. Risk is reduced by owning non-correlated assets such as Stocks and Bonds and the level of risk is determined by the allocation of money to each. Higher risk investors will get a higher allocation to Stocks. MPT portfolios require investors to hold BOTH winning and losing investments at all times. This reduces risk but also reduces returns.
MPT Management Strategy - Buy and Hold
Once an allocation is determined the portfolio is meant to be bought and held for the long term, MPT provides no guidance as to when and how to change their holdings. As a result, MPT portfolios have no sensitivity to market movements. The following diagram illustrates how an MPT portfolio is structured and managed on an ongoing basis. I have simply used a Total Stock and a Total Bond Exchange Traded fund to represent the two major, non-correlated assets. You can see that this is a static portfolio that while this type of portfolio must be re-balanced periodically to maintain the allocation assignments it requires human intervention to respond to market changes.
MPT Portfolio Performance 2008-2017
Below is the backtested performance for the period from the start of 2007 to the end of 2008 along with the period's Average Annual Returns and the portfolios Sharpe Ratio which is a measure of how much return was achieved for each unit of risk taken - the higher the better.
The Dynamic Investment Solution and Performance
Whereas an MPT portfolio is both static and "dumb", a Dynamic Investment is both dynamic and "smart". Its components are shown below. It has what we call a Dynamic ETF Pool (DEP) that holds "candidates for purchase by the DI. It also has the built in intelligence to periodically rank the ETFs in the DEP, using a price chart "trend indicator" to determine which is trending up in price most strongly. This is the ONE ETF held for one period until the DEP is ranked again and either the currently held ETF is kept for another period or changed if another ETF is moving up in price more strongly. A typical ranking period would be "quarterly".
You can see that a Dynamic Investment strives to hold ONLY winning investments while quickly selling or avoiding losing investments. We call this "time-diversification" and it not only reduces risk but enhances returns! Time-diversification makes DIs "market-sensitive" and in designers don't need to worry about the holders risk tolerance or asset allocation percentages - both processes that are wide open to human error. The DI designer does not even need to worry about predicting the which asset types will move up in price in the future. The designer simply identifies a group of ETFs to place in the DEP and the MARKET selects which to own at any one time.
DIT Management Strategy - Buy and Sell
Note that in this example the periodic review period is "quarterly" thus the Q1, Q2, etc. time stamps on each holding. The review period is a varialbe defined by the DI designer.
Simple Dynamic Investment Performance 2008-2017
The performance of the simplest possible DI, one that only rotates between a Stock and Bond ETF, is simply stunning. What MPT portfolio, regardless of how sophisticated, earned anything close to +26% per year during this volatile period? None. What MPT portfolio designer could have possibly decided when to change the investments holdings in such a precise and timely manner? None. And this higher rate of return did not come with higher risk as evidenced by the Sharpe Ratio going up along with the returns.
Today's "experts" will say that this performance is impossible. And it IS impossible in the MPT-based world of investing. But when we break the MPT chains and evolve to a DIT-based world of investing many outcomes that are currently seen as impossible become probable. Something has changed here, something fundamental and something wonderful. Let's discuss what has changed next.
New Concepts of Investing
Dynamic Investment Theory takes the world outside of the MPT "Box" and the world of investing changes. Here are just a few of the new concepts that make a DIT-based world of investing a far different and more productive place. Each is discussed in detail in The Amazing Future of Investing book discussed below on this page.
1. Dynamic Investments are the Market's First and Only Comprehensive Portfolio Products. Dynamic Investments (DIs) can be viewed and used as complete portfolio "products". Each DI specified the ETFs to be used in its Dynamic ETF Pool AND how these ETFs are to be managed on an ongoing basis. In addition, they have the built-in intelligence to monitor market trends and change the ETF they hold to take maximum advantage of current market trends. As a result a DI can be the only investment that an investor holds. The "productization of investing" is discussed in more detail just below this list. This is a huge step in the evolution of investing!
2. DI's Are Market-Sensitive. Unlike "static" MPT portfolios that once implemented completely ignore market changes, DIs are constantly monitoring market trends and changing the ETF they hold to take advantage of them. This makes DIs "dynamic" and "market-sensitive." Market sensitivity is a major reason why DIs produce returns that are significantly higher than buy-and-hold MPT portfolios with lower risk and no active management required. Market-sensitivity is required to cope with today's volatile markets.
3. DI's Have a Universal Goal. The goal of MPT portfolios is to match the risk profile of each investor. This means that each is a unique, customized creation and making the design process a difficult task. In contrast, DIs all have the goal of detecting market uptrends wherever and when-ever they exist in the market in order to maximize returns and minimize risk. This is a universal goal that has nothing to do with individual risk tolerance profiles. Therefore there is no need to customize them for each investor. As a result, the DI creation process is greatly simplified and the DIs created can be sold to the entire investing marketplace as portfolio "products."
4. DI's Introduce "Time-Diversity". Diversity is a critical element of any portfolio design. Both MPT and DIT portfolios take advantage of Asset and Company Diversity to reduce risk - but also reduce returns. DIs use an additional form of diversity called "Time-Diversity" that results from the DI being able to automatically change the ETF it holds periodically based on market trends. This new form of diversity, introduced here for the first time, not only reduces risk but also enhances returns! This is a revolutionary concept in world of investing.
5. DI's Simplify the Portfolio Design Process. MPT portfolio designers face the almost impossible task of trying to select specific equities that will to increase in price over the long-term period during which the portfolio is held without change. In contrast, DI designers have the luxury of selecting groups of ETFs to place in the DI's Dynamic ETF Pool and then letting the "market" select which one to buy at any one time based on the observed price trend strength of each. And history has shown us that the market is a far better predictor of future price trends than any one, or group of, human analysts.
6. DI's Simplify the Portfolio Management Process. Modern Portfolio Theory (MPT) gives no guidance on how to manage a portfolio once implemented other than to suggest that it be bought and held for the long-term. In stark contrast, Dynamic Investments are designed with a specific set of rules for periodically reviewing market trends and changing the ETF it holds based on which ETF in its DEP is trending up most strongly. In other words, DIs have a built-in management strategy that makes changes automatically to take advantage of current market conditions with no human judgments involved.
7. DI's Reduce Dependency on Advisors and Salespeople. A major problem in the world of investing today is investor reliance on human subjective judgments to make trade decisions. Such judgments can be adversely affected by bad data, faulty analysis, sales bias and even outright fraudulent activities. DIs eliminate this major risk factor by basing all trade decisions on the objective observation of empirical market trend data. Reducing or eliminating the human risk element is a huge leap forward in the evolution of investing.
8. DI Creation Is Unique and Simple. Today's primary investment vehicles in the form of Mutual Funds and Exchange Traded Funds requires a lengthy, difficult and expensive process. DI development requires none of that. They are created by simply combing existing ETFs into the dynamic structure discussed above on this page. While creating DIs is simple, designing the most effective DIs requires training of the type offered in NAOI DI Design Classes discussed on this page.
9. DI's Unlock Massive Hidden Value in an ETF Product Line. DIs monetize the combination of existing ETFs. By doing so they uncover massive value that is currently hidden in an existing ETF product line. Through the use of DIs an ETF developer can significantly expand their product line virtually overnight by creating a DI-based product layer consisting of ETF combinations. And each DI will be a portfolio product that can be sold directly to the public.Not only does the introduction of DIs enable the creation of an unlimited number of valuable DIs, it also expands the market reach of ETF developers exponentially and opens massive new revenue streams.
10. DI's Open a Vast and Virgin Field of New Product Development. The world of new investment product development today his hitting a wall. Most mutual funds and ETFs track asset or market indexes. Well, there are a limited number of indexes and most of these already have an ETF tracking them, sometimes several. So in order to be unique new products are increasingly more narrow, more exotic and more risky. The average investor will not buy them. DIs break down this wall. There are an unlimited number of new and powerful DIs that can be created for a full spectrum of investing goals. Research and development dollars spent designing optimal Dynamic Investments will provide a far higher ROI than the same dollars spend on developing traditional mutual funds or ETFs. There are no "walls" to be hit in the field of DI development.
11. Higher Returns without Higher Risk! This evolutionary change in investing is a stunning one. MPT says that higher returns always come at the price of higher risk. If this isn't true the entire theory crumbles. Well, DIT says that it isn't true. Using DIs, higher returns can be produce by simply placing more ETFs in the Dynamic ETF Pool and giving the DI more areas of the market to search for uptrends. Granted, simply adding just any ETF to the DEP does not automatically increase returns. But with NAOI DI training, DI designers will know how to select ETFs that make higher returns possible. Below is a performance comparison between the simple 2-ETF Core DI, discussed above on this page, with the 3-ETF NAOI Primary DI.
You can see that by adding another ETF to the Dynamic ETF Pool, and giving the DI one more area of the market to search for price uptrends, return was increased significantly without additional risk as indicated by the increased Sharpe Ratio.
12. A Simple Transition Plan. Change of the nature discussed here does not come easily to such a staid industry and financial and investing services. That is why the NAOI has created a simple but powerful transition plan from the old to the new. In this plan, DIs are used as simply one building block in an MPT, asset-allocation portfolio. We call this an MPT/DIT Hybrid Portfolio. In this structure the DI will act as both a performance booster and a risk reducer for the portfolio. And designer can transition to the future of investing by simply increasing the allocation to the Dynamic Investment as illustrated in the Transition Table shown below. Here you can see how a Dynamic Investment can be one component of a Stock/Bond asset allocation portfolio with a gradually increasing allocation. And you can see the performance advantages of increasing this allocation. Using this transition plan, DIs can be put to use today without disrupting current operations or revenue streams. Hybrid Portfolios are discussed on the page at this link.
The Holy Grail of Investing Is Found
All of the above factors and others contribute to the most significant change in investing since 1952 when Modern Portfolio Theory was introduced. This evolutionary leap is the "productization of investing." When portfolios become standardized consumer products the entire industry changes - for the better.
Let's briefly review what makes Dynamic Investments "portfolio products"
- A universal goal, there is no need to customize each to match an investor's risk profile
- Each DI is a comprehensive and self-contained investment. It specifies the ETFs to work with as well as how they are to be managed on an ongoing basis
- Once a DI is created, its design does not change even though the ETF it holds at any one time does. This is an active investment that is passively managed - a necessity for its "product" status
- Developers can mass market the "best" Dynamic Investments they create via catalogs like the one shown below. Investors them simply buy, and combine if they wish, the ones that meet their unique needs
The Productization of Investing is the Holy Grail of the financial world that experts have been seeking for decades. They haven't found it. With the discovery, development and release of Dynamic Investment Theory and Dynamic Investments, the NAOI has.
The Productization of Investing and its transformative effects on how we invest today is discussed in detail in The Amazing Future of Investing book discussed just below.
Your Path to the Future of Investing
The world of investing is about to change at a fundamental level. This change is not optional. The NAOI is teaching Dynamic Investment Theory and the use of Dynamic Investments to the public. When they learn about the advantages and performance of DIs they will demand them. Those organizations and advisors who offer them will gain a significant competitive advantage and capture a massive market that is now afraid to even enter the market.
In addition, DIs are so simple to implement and manage that if individuals can't find an advisor who offers them they can easily do so themselves using an online broker. And they will earn returns that no MPT portfolio in existence can top.
Individuals and organizations that learn about and embrace DIs first will benefit the most. Following are the action items that will enable you to do so:
- Read the information on this site.
- Signup to the NAOI Updates Email List at the bottom of any page to be among the first to be alerted when new DI developments and releases occur
- Purchase and read The Amazing Future of Investing book, shown nearby, from the
- Take advantage of one or more of the DI Support Resources discussed at this link
- For financial organizations consider an NAOI Consulting Contract as discussed at this link to develop your unique strategic plan for using Dynamic Investments to meet your goals
- Contact NAOI President, Leland Hevner, directly at LHevner@naoi.org with any questions or for additional information.
Dynamic Investing represents the evolution of investing into the 21st Century. Those who understand and act on the information provided by the NAOI will thrive moving forward. Those who ignore it will struggle to survive. That's just how evolution works.
Progress cannot be ignored!