Welcome to a Web page presented by the National Association of Online Investors (NAOI), the nations leading provider of objective, personal investing education. Here you will learn about a new approach to portfolio design and management called Dynamic Investment Theory (DIT) that we will be teaching our students beginning in the fourth quarter of 2020.

I have this page available to only a select few individuals who I am connected to on LinkedIn - it is not accessible via the site’s navigation bar. I believe that you and your organization will benefit most from being among the first to learn how DIT works and how its introduction will shape the future of investing.

Developed based on a multi-year R&D effort by the NAOI using extensive input from the investing public, DIT defines the logic for the creation an innovative investment type called NAOI Dynamic Investments (DIs) that automatically change the equities they hold based on a periodic sampling of market price trends. By doing so DIs are capable of producing returns that are significantly higher than MPT-based portfolios in virtually all economic conditions with lower risk and no active management required.

The table below illustrates the power of this new approach. The bottom row of the table shows the performance of a simple DI that rotates only between a Stock Market ETF and a Bond Market ETF based on a quarterly sampling of the price trend of each for the 12 year period from 2008-2019. It is compared to the returns of each ETF and an MPT portfolio holding both ETFs at all times with the allocations shown. Not only are the DI’s returns much higher than the MPT portfolio, the risk is actually lower as indicated by the higher Sharpe Ratio.

You will learn how DIT and DIs work on this Web page and on this site. When you understand how they work, you will see how this new approach to investing opens the doors to a simpler, more profitable and less risky future of investing.

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 and the financial organizations they work with.

For over a decade the NAOI has taught traditional MPT-based methods for the design and management of investment portfolios. That is about to change. Below I explain why and how.

Why Change Is Needed NOW!

A recent report (2020) from the CFA Institute showed that only 23% of individuals surveyed trust their financial advisor. This comes as no surprise to the NAOI. We have been working with individual investors for over two decades and we know that they are not happy with the way investing works today. A major problem is that the static portfolios they are given by advisors neither enable them to take full advantage of market price uptrends nor do they protect their portfolio value from significant downtrends and market crashes. As a result, the NAOI is seeing individuals leave, or avoid, the market in alarming numbers.

The source of the problem is that the current industry standard for portfolio design is an approach called Modern Portfolio Theory (MPT) that was introduced to the market in the 1950’s. While markets have changed significantly since then, MPT methods have barely changed at all, and they don’t work in today’s more volatile markets. MPT dictates that portfolios be designed based on a “guesstimate” of each investor’s risk profile and then held for the long-term. As a result, these portfolios have no sensitivity to market movements and are dangerously vulnerable to stock market crashes; an event that happens on an average of every 6 years.

When market crashes occur people are advised to simply “hold on” as the stock market always comes back. And it does, but it can take months or years for a portfolio to recover its losses. As an example, following the market crash of 2008-2009, it took stocks 5 years to recover their value. This is time during which MPT portfolios were simply trying to regain their pre-crash value and not adding value as stocks began a strong uptrend. This is no one’s idea of an effective investing strategy.

Yet following each crash, people are given the same buy-and-hold, MPT portfolios that they know will crash again in the not too distant future. Is it any wonder, then, that people are not happy with their advisors and are either leaving the market, investing far too conservatively or opting for alternative investments such as annuities? In order for the financial services industry to stop the outflow of people from the market and attract new investors, fundamental change to how investing works today is required.

Fortunately for both individual investors and for financial organizations, the NAOI has developed the changes needed. They are discussed below.

Introducing Dynamic Investment Theory (DIT)

Following the 2008-2009 crash, when the MPT portfolios we had taught our students to create lost up to 50% of their value, I stopped all NAOI education classes until we could find an alternative to, or supplement for, MPT for designing and managing portfolios.

Following a multi-year R&D effort using extensive input from the investing public, we met our goal with the creation of Dynamic Investment Theory (DIT). This is the alternative approach to MPT for portfolio design and management that is needed for investors to thrive in modern, volatile markets. More information about DIT is found at this link.

DIT sets the logic for a new investment type called NAOI Dynamic Investments (DIs). DIs are designed to periodically sample market price trends and automatically signal trades to buy equities that are trending up in price while avoiding, or quickly selling, equities that are trending down. By striving to hold only uptrending equities DIs are capable of producing returns that are far higher than those of traditional MPT portfolios in all economic conditions with lower risk and no subjective human judgments involved. More information about DIs is found at this link.

How Dynamic Investments Work - An Example

The charts below show a very simplified example of how DIs work. The top chart shows the price trends of two uncorrelated assets classes - Stocks and Bonds - that cycle up and down in price at different times. The vertical lines on the chart represent “Review Events” when the DI samples the price trend of each and buys, or retains if already owned, an ETF that tracks the asset type that is trending up in price most strongly. At the bottom of each Review line is the asset purchased, S=Stocks, B=Bonds, and held until the next Review. The bottom charts shows how the value of this DI constantly increases, except for a very brief time when the asset-class price trends change.

Of course in the real world asset types do not move up and down in the perfect manner shown in the top chart. During uptrends there are always price dips and during downtrends there are upward price spikes. The NAOI has developed proprietary methods for avoiding these short-term price movements in long-term price trends. This breakthrough development makes price-trend following simple, profitable and safe for individuals to use.

The Dynamic Investment Theory Book

A detailed description of the NAOI research and development project and how we designed Dynamic Investments to work in modern, volatile markets is described in the “Introduction to Dynamic Investments and Market Sensitive Portfolios” book pictured at right. It is available for purchase in the NAOI Store found at this link.

Advisors, financial organizations and even individuals will be able to create basic, but powerful, Dynamic Investments and Dynamic Portfolios immediately upon completion of this easy-to-read book. It not only provides readers with the theory behind the NAOI dynamic approach to investing, it also provides actionable information. The book’s Table of Contents is also shown in the NAOI Store.

However, creating optimal DIs that produce the highest-returns with lowest-risk in all economic conditions requires advanced DI Design Training that is described below on this page as one element of the NAOI’s extensive Dynamic Investment Support platform. We also offer a catalog of optimized DIs designed by the NAOI that can be used immediately by readers of this book.

The Anatomy of Dynamic Investments (DIs)

DIT logic enabled the NAOI to create an innovative investment type called Dynamic Investments. While there are an unlimited number of DIs that can be easily created to meet a full range of investing goals, each has the components shown below. Each component is explained below the diagram.

The Dynamic Investment Components

• Dynamic Equity Pool (DEP) – Defined by a DI Designer, these are the ETFs that will be ranked periodically to find the one having the strongest price uptrend. This is the one ETF that is bought and held until the next Review event.

• Review Period – This is how often the ETFs in the DEP are ranked by price trend and the one owned by the DI changed if needed.

• Price Trend Indicator – This is the price trend indicator that the NAOI has found to work exceptionally well for ranking the ETFs in the DEP.

• Trailing Stop Loss Order (TSL) – A TSL order is placed on each ETF purchased by the DI to protect its value from sudden and significant price drops during its short holding period between Review events. This component provides DIs with absolute protection from market crashes.

Dynamic Investments represent a truly evolutionary change to investing. They are a comprehensive investment, not only specifying the equities to work with but also incorporating a automated trading plan for taking profits and avoiding losses based on objective observations of market data - not on subjective human judgments. As a result, they can be seen as the market’s first and only “plug-and-play” portfolio product that individuals can buy and hold while the DI signals trades as needed. They represent the beginning of the productization of investing that the NAOI believes will define the future of investing.

The Dynamic Investment User’s Manual

The NAOI shows individuals the benefits of using Dynamic Investments via the book shown at right that also teaches them how to create, implement and manage their own simple, but powerful, DIs. This book will soon be available both in the NAOI Store where it will reach thousands of investors and on Amazon.com where it can reach millions.

When the investing public learns about the simplicity, high returns, low risk and absolute protection of their portfolio value from market crashes, the demand for them will grow. Readers of this book will look for advisors and financial organizations that offer them. If they can’t find any, they will be fully capable of implementing and managing the DIs and Dynamic Portfolios shown in the User’s Manual using an online broker. The book shows them, step-by-step, the simple steps for doing so.

Many NAOI students who have been taught how to use DIs are self-managing them today, without the assistance of financial professionals. And they are doing quite well as illustrated below.

Dynamic Investment Performance – A Simple Example

There are an unlimited number of DIs that can be designed to meet a full spectrum of investing goals. To demonstrate the power of this investment type, I show below the performance of a simple DI that rotates only between two Stock Market ETFs and one Bond Market ETF based on a quarterly sampling of the price trends of each. The table shows this DI’s return for the 12-year period from the start of 2008 to the end of 2019. I have compared it to a traditional, MPT buy and hold portfolios having a 60% allocation to a Total Stock Market ETF and a 40% allocation to the Total Bond Market ETF.

By being market-sensitive and having a built-in, automated trading plan, this simple DI was able to avoid the subprime market crash of 2008-2009 by quickly switching its holding from the Stock ETF to the Bond ETF and then, in 2010 back to the Stock ETF to take full advantage of the subsequent Bull Market . Also note that not only were the returns of the DI over three times higher than the MPT portfolio for this period, it delivered this performance with less than half the risk as shown by the higher Sharpe Ratio.

The NAOI Dynamic Portfolio (DPort)

While a single DI such as the one shown above can be the only investment in a person’s portfolio, the NAOI knows that people are not comfortable allocating all of their money to one ETF at a time. And this is understandable. So we created a new portfolio type called Dynamic Portfolios (or DPorts) to address this issue. They are explained below.

It is important to understand that the NAOI is not advocating that DIT methods completely replace MPT methods. These two approaches work quite well together. A DIT Segment containing at least one DI can easily be added to an MPT portfolio to create a DPort as illustrated in the diagram below. Adding a DI building block makes an MPT portfolio market-sensitive and far more effective.

The diagram also shows that the percent allocations to each Segment and to the holdings of each Segment are variables that an NAOI trained designer can adjust to meet the specific needs of a client. NAOI testing has shown that a higher allocation to the DIT Segment, the higher the performance of the DPort will be. More information about Dynamic Portfolios is found at this link.

The NAOI Universal Portfolio

With the methods and tools described above, the NAOI was able to create something extraordinary. We were able to design a Universal Portfolio that works for all individuals regardless of their risk tolerance; meaning that it does not need to be customized for each investor. A high-return, low-risk portfolio that works for everyone is a game-changer in the world of investing.

Significant testing by the NAOI showed that the DPort configuration presented below provides the optimal balance between return and risk needed for a Universal Portfolio. This is the DPort that we recommend to our students as a “default” investment, regardless of their risk profile. And this is a portfolio that they can begin using immediately after finishing an NAOI class or reading one of our books.

The Universal Portfolio Design

At all times this portfolio will hold at least two non-correlated asset types - Stocks and Bonds - which NAOI students told us gives them a “comfort level” that single DIs don’t. At any given time, allocations to each asset class will depend on which ETF the Dynamic Investment selects at a Review event based on the strength of its price trend. Below is the performance table for the NAOI Universal Portfolio for the same time period used in the single DI performance test shown just above - from the start of 2008 to the end of 2019.

The Universal Portfolio Performance 2008-2019

You can see that while the Universal Portfolio returns were lower than the single DI from the above example, the risk was also significantly lower as evidenced by the higher Sharpe Ratio. This is the portfolio that most NAOI students elect to hold after completing our classes.

Note that when the market crashed in the first Quarter of 2020, this portfolio automatically got out of the market with minimal loss.

Some Interesting Statistics

Several statistics related to the Universal Portfolio performance shown above are worth noting:

• During this 12 year period that included a major market crash the Universal Portfolio had NO years when it lost money

• The portfolio was reviewed quarterly for 12 years, thus, 48 times it automatically generated either a signal to change the ETF held or to retain it until the next review. 40 out of 48 times, the ETF purchased produced positive returns for portfolios next holding period. This is an 83% success rate for the trading plan built into the Universal Portfolio!

• The median gain for each winning period was +5.21%, the median loss for each of the 8 losing periods was -2.42%

• The Trailing Stop Loss order for the Dynamic Investment holding, set at a drop of 7%, was triggered only 3 times during the entire period, each time avoiding major losses

The performance of the Universal Portfolio was outstanding for the period tested. And as long as the prices of Stocks and Bonds trend, and in opposite directions, it will continue to outperform any MPT portfolio in existence.

A New Portfolio Performance Benchmark

The NAOI will be teaching our students to use the NAOI Universal Portfolio performance as a “benchmark” for evaluating the performance of any MPT portfolio recommended to them by an investment advisor. If the MPT portfolio does not produce higher returns, why should clients even consider it when the Universal Portfolio is so simple to implement and manage? Faced with this type of comparison, advisors will need to provide the Universal Portfolio to their clients or have good reasons why they won’t.

Four Portfolio Diversification Factors !

A major reason why this and all Dynamic Portfolios perform so much better than today’s MPT portfolios is that while MPT portfolios use two diversification factors, DPorts use four, making them far more powerful and effective investments. These diversification factors are:

• Company Diversification - via the use of ETFs (used by MPT and DIT portfolios)

• Asset-Class Diversification - by working with multiple asset classes (used by MPT and DIT portfolios)

• Time Diversification - due to the DI’s periodic reviews and potential changes in the equities held (used by DPorts only)

• Methodology Diversification - by using both MPT buy-and-hold methods and DIT buy-and-sell methods (used by DPorts 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, used only by DPorts, 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.

There Will Be Skeptics

As you read the information on this page, you may have doubts. I would if reading it for the first time. To address these doubts an entire chapter in the “Introduction to Dynamic Investments and Market Sensitive Portfolios” book, pictured above, is dedicated to addressing them. Below are the top 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. So, yes, it is true that YOU cannot time the market; but market price-trends can time the market with remarkable accuracy.

3. There are already momentum products in the market - this is nothing new. The NAOI is well-aware of momentum and factor-based ETFs in the market. In fact, we use some of them in our Dynamic Investment designs. But the NAOI is introducing far more than several trend-following ETFs. We are offering the logic and a platform that enables the easy creation of an unlimited number of price-trend following investments that can meet a wide spectrum of investing goals. And the DIs created using the NAOI platform will provide far higher performance than the momentum-based products available in the market today.

4. The financial industry will not accept a change this big. True, the financial services industry does not accept fundamental changes easily and many in this field will oppose the innovations presented here. There are three responses to this objection. First, the change is not huge when DIs are simply used as building-blocks in traditional MPT-based, advisor portfolios as shown just below. The addition of a Dynamic Investment will both boost the advisor portfolio’s returns and lower its risk.

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. And third, DIs and DPorts are so simple to implement and manage that individuals will be able to easily take advantage of them on their own using an online broker - the DI User’s Manual show them how and NAOI support offerings will assist them. The investing public does not need the industry’s “acceptance and blessing” to take advantage of Dynamic Investments.

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 offer them in order to survive.

Working with the NAOI

Focus groups of NAOI students who have field-tested the use of Dynamic Investments in their portfolios have told us that this is the approach they have been looking for to enter the market with confidence and without fear. And they will search for advisors that offer them. The NAOI is fully prepared to show advisors and financial organizations how to take advantage of this coming demand via the one or more of the options listed below.

Getting Started - Read the Book

This is a major change to how investing works. Before committing time, energy and resources to an NAOI cooperative agreement we strongly suggest that you first buy the” Introducing Dynamic Investments” book for professionals found in the NAOI Store. Then let’s discuss the options presented below as well as other types of cooperation agreements that believe will work best for your unique situation.

Advanced Dynamic Investment Education Classes

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 fully master the art and science of DI and DPort designs, the NAOI offers advanced Seminars and Classes as discussed at this link.

NAOI Consulting

The NAOI offers Consulting Agreements that show financial organizations how to create and use a full product line of proprietary Dynamic Investments and Dynamic Portfolios in order to capture new clients, retain existing clients and increase new revenue streams in a variety of areas unique to their business. Here are several examples; there are others:

• 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 the use of DI and DPorts will make your job significantly easier and the portfolios you create more profitable than virtually any MPT-based portfolio in existence today.

• For Financial Advisors and Planners: 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. You can also forget about the complexities of periodic portfolio rebalancing - it is automatic. Using DIT methods you will spend far less time creating customized portfolios and more time on financial planning, an area of wealth creation that doesn’t receive the attention it deserves today.

• For Retirement Plan Providers: A large percentage of NAOI students seek guidance for investing in their Retirement Plans. When we review their portfolios they are all over the map. Some are too risky while others are too conservative. And a major flaw we see all too often is that advisors tell them to increase portfolio allocation to Bonds the closer they are to retirement age; at a time when they need income the most. The NAOI Universal Portfolio is the perfect portfolio for Retirement Plans. You read above how it provides both high income and low risk. Via a Consulting Agreement we can show Retirement Plan Providers how to capture a large share of this very lucrative, and competitive, market.

The NAOI has developed DI applications for virtually all financial applications. The ROI of an NAOI consulting contract will be off-the-charts high. We guarantee it. More information on NAOI Consulting is found at this link.

NAOI Partnerships

The financial industry does not have a great reputation today with the investing public. As mentioned at the top of this page, a CFA Institute study showed that only 23% of individuals trust their financial advisors. Because the NAOI is recognized by the public as an objective strong advocate for the individual investor, a Partnership with us will immediately increase an organization’s “trust factor” by multiple levels. More information on the types of NAOI Partnerships offered is found at this link.

Summary - The Evolution of Investing

On this page you been given just a glimpse of how investing is evolving to create a more user friendly and profitable future of investing for both buyers and sellers. Dynamic Investments and Dynamic Portfolios are the high-return, low-risk investment types that the public has been looking for to enter the market with confidence. As a result, when the investing public learns about them they will enter the market in massive numbers.

Financial advisors and organizations that embrace this evolutionary approach to investing will profit greatly. Those that prefer to ignore adapt to changing markets and opt to ignore it will struggle to survive. That’s just the way evolution works.

Contact Information

Please feel free to contact me directly at: LHevner@naoi.org for more information related to any topic on this page. I would also welcome a discussion on how we can cooperate in a manner that enables your organization to take full advantage of the demand for Dynamic Investments that is coming soon.

And consider joining the NAOI Updates Email List via the form at the bottom of this and each page to be alerted to NAOI product releases, DI performance results and other significant developments.