The World of Investing Is About to Change
- A Quick Introduction to NAOI Dynamic Investments -
Introductions
Allow me to introduce myself as Leland Hevner, President and CEO of the National Association of Online Investors that I founded in 1997 with the mission of empowering individuals to invest with confidence via education and the use of online resources. Thousands of people 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 people invest today and the financial organizations they choose to work with.
The purpose of this page is to present a short preview of a new approach to portfolio design and management developed by the NAOI that we will be including in our education content beginning the the fourth quarter of 2020. This approach includes the use of an innovative investment type, called NAOI Dynamic Investments (DIs), that are capable of changing the equities that they hold based on a periodic sampling of market trends. By doing so DIs are market-sensitive and able to produce returns that static, MPT portfolios can’t touch with lower risk and no active management required.
By Invitation Only
This page is not accessible via the site’s navigation menu. I am making it available to only a select group of my LinkedIn contacts who I believe will benefit most by learning about this new approach first, and beginning to plan now for the investor demand that it will generate.
Why Change Is Needed
For over a decade following our founding in 1997, the NAOI taught Modern Portfolio Theory (MPT) methods as the only option for the design and management of investment portfolios. Introduced to the market in 1952, MPT dictates that portfolios be customized to match the risk tolerance of each investor and then they are to be held for the long-term.
However, following the stock market crash of 2008-2009 and the extensive losses suffered by the MPT portfolios we were teaching students to create, we had to face the fact that MPT methods, introduced to the market in the 1950’s, were outdated and dangerously vulnerable to market crashes that happen on an average of once every 6 years.. Our students told us then, and are still telling us still today, that owning static, buy-and-hold portfolios with no trading plan to either take full advantage of up-markets or to protect them from down-markets and crashes was simply too stressful. As a result we are seeing people in increasing numbers leaving the market, or not entering it at all.
To stem this exodus, following the 2008-2009 crash the NAOI opened an R&D Division to find an alternative to MPT methods for the creation and management of investment portfolios; one designed specifically to thrive in modern market volatility. On this page you will read a short summary of how we found it in the form of Dynamic Investment Theory and a new, market-sensitive investment type called NAOI Dynamic Investments.
Introducing Dynamic Investment Theory (DIT)
Click to enlarge
Note that the information provided on this page and throughout this Web site is a summary of the content provided in the book shown at right. It is available for purchase in the NAOI Store found at this link.
Starting with Investor Goals
As the NAOI began our search for a better approach to investing, I was adamant that it be designed based on meeting the wants and needs of the individual investor, not on decades old academic theories such as MPT. Thus, our first task was survey average people with money to invest to discover what they needed to invest with confidence and without fear. Fortunately the NAOI has access to hundreds of such people who are our students. Here are the top goals they wanted in a new approach.
Simple to work with and easy to understand
Higher returns with lower risk than the MPT portfolio that they have been advised to hold for decades
Absolute protection from market crashes
A viable Do-It-Yourself (DIY) option
We immediately saw that MPT met none of these goals so we started with a blank slate - unlettered by the constraints of current industry standards.
Quantitative Analysis - The Core of the New Approach
Following a multi-year research and development effort we found the new approach to investing that met all of the public’s goals and more. To do so we turned to a field of study called quantitative analysis and focused on the proven predictive power of price trends. Here we made the following observations that enabled us to create a new theory of investing and thus a new investment type.
Equity Prices are Cyclical – The prices of Asset Classes and Market Segments are cyclical; they move up and down over time.
Equity Prices can be Non-Correlated – Different Asset Classes and Market Segments move up and down in price at different times.
Price Trends are Persistent – Price trends last for relatively long periods of time. The average length of Bull/Down Markets is 72 months while Bear/Up Markets last an average of 14 months.
A Hypothesis
Based on these observations we created the hypothesis that a new investment type could be created that was capable of detecting and buying only into uptrending equities and avoiding, or quickly selling, those trending down. By doing so it could consistently produce returns that are significantly higher than virtually any buy-and-hold portfolio in all economic conditions - good or bad.
A New Theory of Investing
Extensive testing showed us that our hypothesis had a high probability of being true. As a result we changed our hypothesis to a theory and called it Dynamic Investment Theory (DIT). We called the new investment type it creates Dynamic Investments. They are discussed next.
Introducing Dynamic Investments
DIs are an investment type the likes of which the investing world has never seen. Each is a comprehensive investment that not only contains the ETFs the DI works with but how they are too be managed on an ongoing basis. Each is, in fact, a “portfolio in a box”. A far more detailed description of DIs is found i the book, pictured above.
Dynamic Investment Components
An unlimited number of DIs can be created by a trained DI designer to meet a full spectrum of investing goals. But all will have the components shown in the following diagram with explanations for each component listed below it.
Component Descriptions
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.
Each of these components is a variable that an NAOI trained Dynamic Investment designer can change. However, the NAOI has found what we believe to be optimal values for the Review Period, the Price Trend Indicator and the TSL sell-point. This leaves as the only variable the ETFs placed in the DEP. Here is where a designer can quickly and easily create a full product line of DIs for virtually any investing goal.
How Dynamic Investments Work
The charts below present 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. For this example let’s assume that each asset class is represented by a total Stock and total Bond market ETF and these ETFs are placed in the DI’s Dynamic Equity Pool - again as discussed above.
The vertical lines on the chart represent “Review Events”, as discussed above, when the DI samples the price trend of each ETF and buys, or retains if already owned, the ETF trending up in price. At the bottom of each Review line is the asset-type purchased, S=Stocks, B=Bonds, and held until the next Review. The bottom chart shows how the value of this DI constantly increases over time. The only exception was a very brief period when the asset-class price trends reversed and the currently held DI began a significant drop in price. At that point the DI’s Stop-Loss Order triggered a sale of the ETF being held and the DI went to Cash until the next Review Event when it purchased the Bond ETF.
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. These methods make price-trend following simple, profitable and safe for use by individual investors and/or by their advisors.
A DIT / MPT Performance Comparison
To illustrate the performance power of Dynamic Investments the table below shows the performance of the simple Dynamic Investment discussed above that holds only a Total Stock ETF or a Total Bond at any one time as compared to an MPT portfolio using the same ETFs, but holding both at all times with a 50% allocation to each. The time period used is from 2008-2019, a period that included a major market crash and an unprecedented bull-market run.
How did the DI produce such high returns? A main reason is that all DIs use a new diversification element that the NAOI has labeled “time-diversification”. It results from the DI being able to change the ETF it holds based on periodic Reviews of price trends of the ETFs in its DEP. Time-diversification makes investments and portfolios “market-sensitive” and capable of far higher performance than static MPT portfolios that hold both winning and losing investments at all times. DIs are designed to hold ONLY winning investments and this makes a huge difference.
It should be noted that even this performance can be increased, without additional risk, by adding more, and carefully selected, ETFs to the DEP. For example by adding just one more ETF to the above DI returns for the test period shot up to +25.7% per year with a Sharpe Ratio of 1.09. Higher returns such as these with lower risk blows MPT theory - that is based on the assumption that higher returns come ONLY with higher risk - out of the water. Breaking the MPT risk/reward link is only possible by thinking differently about investing.
Dynamic Portfolios
It is important to make clear at this point that the NAOI is not advocating that DIT methods completely replace MPT methods. They work quite well together in a new portfolio type we call NAOI Dynamic Portfolios (DPorts) as described below.
While a single DI, such as the ones used in the above examples 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.
DIs can easily be added as building blocks in a traditional MPT portfolio to create a DPort as illustrated in the diagram below. DI building blocks make an MPT portfolio dynamic, intelligent, market-sensitive and far more effective than the static and “dumb” investments that they are today.
NAOI Default DPort
Simple DPort Performance
A DPort with a 50% allocation to the Dynamic Investment, 30% to the buy-and-hold Stock ETF and 20% to the Bond ETF produced the following performance for the period from 2008-2019 as compared to an MPT portfolio:
A Non-Disruptive Change
During the Peer-Review stage of DIT and DI development we were warned that the financial industry would be very reluctant to accept such a significant development to how investing works. And we know this to be true. But we have made allowances for this reluctance by showing how DIs can simply be used as building blocks in traditional MPT portfolios as illustrated in the diagram below. The addition of a DI will make any MPT “market-sensitive” and both enhancing returns and lowering risk. As a result DIs can be used with little to no disruption to an organization’s revenue streams - other than to expand and increase them.
The Use of Four Portfolio Diversification Factors !
Above I have shown examples of how Dynamic Portfolio provide significantly higher performance than MPT portfolios. A major reason for this 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 - arising from the DI’s periodic Reviews and changes in the equities held (used by DPorts only)
Methodology Diversification - arising from DPorts 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.
Why this Approach to Investing Cannot Be Ignored
The NAOI will begin teaching the design and use of Dynamic Investments in the fourth quarter of 2020 throughout our education channels where it can reach thousands of individuals. And the book shown at right that also teaches this new dynamic approach to investing will also be available on Amazon and other online sites where it can reach millions..
This short and easy-to-read book teaches average people with money to invest how to create, implement and manage their own simple, but powerful, DIs using an online broker. The NAOI knows, however, that most individuals will prefer to work advisors to implement DIs and Dynamic Portfolios and they will look for advisors and financial organizations that offer them. The NAOI offers consulting services and partnerships that show investing professionals how to take full advantage of these new investment types and meet the coming demand from the public.
If individual investors can find no advisors or organizations that offer them, they will be fully capable of implementing and managing the DIs and Dynamic Portfolios using an online broker along with support from the NAOI.
The Benefits of Using Dynamic Investments
The benefits of using Dynamic Investments are many for both individuals and for the financial services industry. To learn about just a few click the following links:
The Future of Investing Starts Here (R)
The world of investing has been stuck in place for far too long. We are still using 1950’s era methods to deal with 21st century markets and they simply can’t cope. In this short summary page I have shown how the NAOI has created a new, dynamic investment type that not only copes with modern volatile markets but thrives. By using the predictive power of price trends in a simple, effective and safe manner, the NAOI has created a new investment type called Dynamic Investments that automatically takes advantage of up-trending markets and avoids down-trending markets. NAOI students who have learned about DIs and field-tested them (prior to full release) for multiple years tell us that this is the approach to investing that will finally enable them to enter the market with confidence and not fear.
DIT and DIs are the evolutionary change that will bring a large number of people into the market that are now on the sidelines in fear. And the NAOI is uniquely positioned to make it happen. We will be teaching the use of DIs in our extensive education channels and publishing books related to its use as discussed just above. As this happens, demand for DIs will grow. At the same time we will be consulting with advisors and financial organizations on how to meet this demand and by doing so both increase their client base and open new revenue streams.
The Evolution of Investing Has Just Begun
By breaking how we are taught to invest out of the MPT “box” a massive and virgin field of new product development and opportunities has opened its doors. What you have learned on this page, and on this site, is the first step in restarting the evolution of investing. There is more to come; and much of it will originate with the NAOI as the voice of the investing public. That is why “The Future of Investing Starts Here” is a registered trademark of the NAOI and Leland Hevner. We invite you to join us this effort.
