The NAOI White Paper introduces a new investing approach called Dynamic Investment Theory (DIT) and a new investment type that DIT creates called Dynamic Investments (DIs). These are market-sensitive investments that produce higher returns with lower risk than virtually any equity type or MPT-based portfolio in existence today. They enable financial organizations to create and offer a uniquely powerful product-line and more effective investing solutions that better meet the wants and needs of both individual and corporate investors. The investment product-line of the future is explained below.

Two Approaches to Portfolio Design and Management

The diagram presented below shows the investment product-line of the future. It consists of two approaches to portfolio design and management as follows:

• Modern Portfolio Theory - MPT is the industry standard approach for portfolio creation today. It dictates that portfolios be designed to match the risk profile of each investor. These portfolios are then meant to be held for the long-term. Equity purchase and trade decisions are based on subjective human judgments. MPT portfolios use two diversification elements - Company Diversification by holding ETFs and/or mutual funds and Asset Diversification by holding uncorrelated asset-classes at all times - e.g. Stocks and Bonds. Holding both winning and losing asset classes at all times reduces risk but also reduces returns.
  

• Dynamic Investment Theory - DIT is the new approach to portfolio creation introduced by the NAOI in the White Paper. DIT creates a new investment type called Dynamic Investments that are capable of automatically changing the ETFs they hold based on a periodic sampling of market trends. Equity purchases are, thus, made based on objective observations of market data - with no subjective human judgments involved. DIs use three diversification elements - Company, Asset-Class and a new type of diversification that the NAOI calls “Time-Diversification” that not only reduces risk but enhances returns.

The product line of the future will use both approaches to create what we call Dynamic Portfolios. As explained in Section 7 of the White Paper, Dynamic Portfolios will include both an MPT Segment and a DIT Segment. Thus, they will add a fourth diversification element in the form of “Management Method-Diversity” - i.e. using both a MPT buy-and-hold method and a DIT buy-and-sell method.

The Investment Product-Line of the Future

The diagram below illustrates the investment product-line of the future. Shown in yellow boxes are investment types in use today. Shown in green boxes are new investment products introduced by the NAOI using Dynamic Investments. Descriptions of each product-line component are presented below the diagram. The NAOI White Paper explains the structure, purpose and use of each in greater detail.

Current Investment Product-Line Components

The numbers in the list below correspond to boxes in the diagram, above; explaining each.

1 and 2 - Exchange Traded Funds (ETFs) and Mutual Funds

These are the primary investment types used to build portfolios today. Both hold baskets of Stocks, Bonds or both. The main difference between these two investment types is that ETFs trade like stocks while Mutual Funds trade only at the end of a trading day. Also ETFs management fees are typically lower than Mutual Funds.

One Diversification Element - ETFs and Mutual Funds are Company Diverse by holding the stocks or bonds for multiple companies.

3 - MPT Portfolios

Virtually all investors today are given portfolios created using a methodology called Modern Portfolio Theory (MPT). MPT portfolios are designed and customized to match the risk tolerance each investor using asset allocation techniques, typically between uncorrelated asset-classes such as Stocks and Bonds. Then these portfolios are meant to be held for the long-term, through all economic conditions. Changes are typically made only to rebalance the asset allocations to bring them back in line with the investors risk level.

Two Diversification Elements - By holding both Stocks and Bonds at all times, using ETF or Mutual Funds, these portfolios are both Company Diverse and Asset-Class Diverse. These diversity elements not only reduce the risk of owning MPT portfolios but they also reduce their returns.

As explained in Section 3 of the NAOI White Paper, a major problem of owning MPT portfolios is that their buy-and-hold management strategy makes them insensitive to economic and market changes. As a result, they don’t enable owners to take full advantage of market gains and they don’t provide absolute protection from significant market losses. This is a major reason why many individuals who need investing income are not participating in the market today.

New Investment Product-Line Components

The list below describes new, innovative elements that will be a part of the product-line of the future.

4 - Dynamic Investments

The NAOI White Paper shows how the NAOI is solving the problems related to owning static, MPT Portfolio via the introduction of a new investment type called Dynamic Investments (DIs). As discussed in Section 5 of the White Paper, DIs are capable of automatically changing the ETFs (or Mutual Funds) they hold based on a periodic sampling of market trends. They have a built-in trading-plan that strives to purchase (or retain if already owned) only ETF(s) that are moving up in price at a periodic review (typically quarterly) and to avoid, or quickly sell, those that are moving down in price. By being “market-sensitive”, extensive testing has shown that DIs are capable of producing returns that are far higher than virtually any ETF, Mutual Fund or MPT portfolio in existence today.

Three Diversification Elements - Dynamic Investments take advantage of 3 Diversification Elements as listed below. Dynamic Investments are:

• Company Diverse by holding ETFs

• Asset-Class Diverse by owning either Stock-based ETFs or Bond-based ETFs, depending on the price trends of each

• Time-Diverse by automatically changing the ETF owned, as signaled by the built-in trading system, at a periodic review of ETF price trends

It is important to note that while Company and Asset-Class Diversification both reduce risk and reduce returns, Time Diversification reduces risk while enhancing returns. Time-Diversification is the factor that enables DIs to produce higher returns than MPT portfolios with lower risk.

Click this link to see the performance difference between a simple Dynamic Investment and a generic 60/40 MPT Portfolio.

The diagram above also shows that DIs can be sold as investment/portfolio “products” directly to investors who can easily implement and manage them using an online broker with guidance from the soon to be released NAOI Dynamic Investment User’s Manual.

5. Dynamic Portfolios

While one Dynamic Investment can serve as an investor’s total portfolio, it is not the purpose of the NAOI to replace MPT Portfolios with DIT-based portfolios. They work quite well together. Dynamic Investments can be used as “building blocks” in traditional MPT portfolios to both enhance returns and reduce risk. Explained in Section 7 of the White Paper, we call these Dynamic Portfolios or DPorts for short.

Four Diversification Elements! - DPorts take advantage of an amazing FOUR Diversification elements as follows.

• Company, Asset-Class, and Time Diversification as discussed above for Dynamic Investments.

• Plus “Methodology Diversification” as DPorts hold both a DIT-based, buy-and-sell Segment and an MPT-based, buy-and-hold Segment, allowing them to take advantage of the best features of each methodology.

The benefits of using DPorts as opposed to stand-alone MPT portfolios, will quickly become recognized by both financial advisors and financial organizations and demand for them will grow fast. Advisors that offer DPorts will hold a massive competitive advantage over those that don’t.

A New Scientific Approach to Portfolio Design

Today, there is very little “science” involved in creating investor portfolios. They are designed based on “guesstimates” of the risk profile of each investor and trades are made based on subjective market analysis, and market movement forecasts are as often wrong as they are right. Because of the subjective nature of making equity purchase and trade decisions, all that I could do as a teacher of investing for close to two decades was show students how investing works today; not how they could maximize their investing returns while minimizing risk.

With the introduction of DIT and DIs and the new product-line shown above, scientific methods CAN BE USED to teach individuals how to invest with success based on objective observations of market data. This change now enables me, and investment advisors, to teach not only how investing works but how they can use the investment products shown in the above diagram to obtain higher returns with lower risk. In other words, the new DI-based product line of the future changes the world of investing from what is essentially a “guessing-game” to a legitimate science. And “science” can be taught.

The NAOI currently teaches this new “science of investing” to our students as well as to financial advisors and financial organizations via a consulting agreement as discussed in the Addendum of the White Paper.