Defining and Developing a Better Future of Investing
In 2008-2009 when the stock market crashed and portfolios created using Modern Portfolio Theory (MPT) methods crashed with it, we realized that a fundamental change to how we invest was long overdue. We needed to find a better approach to portfolio design and to investing in general; one that not only protected a portfolio’s value in all economic conditions, but also captured the positive returns that exist somewhere in the market at all times. To meet this need we opened the NAOI Research and Development Division. This page discusses how we found a better approach to investing and how our Research Division continues to provide the innovative thinking that is required to empower individuals to invest with confidence.
Transforming Investing from an “Art” to a “Science”
As we began our research effort to find a better approach to investing, we immediately saw that much that is wrong with the we invest today comes from the dependence of subjective judgments to both design portfolios and to determine when and what to trade. This opens the door to a huge are of “human risk” that includes negative factors such as using bad data, faulty analysis, sales bias, fraud, scams and all manner of investor abuse. We saw that this dependence on human judgments made investing more of an “art” than a “science” and the competency / honesty of advisors was a major factor in how well portfolios performed. We found this to be unacceptable.
Thus, one of our main design goals for a new approach was to replace subjective judgments with objective observations of market data as the basis for making investing decisions. We found the data needed in the form of asset and market price trends as explained at this link.
A Breakthrough Discovery
Following a multi-year R&D effort, we found the better approach to investing we were seeking with the discovery of Dynamic Investment Theory (DIT) and a new investment type called Dynamic Investments (DIs) that we released on a limited basis to NAOI students in 2016. The positive feedback we received from these students told us that DIT and DIs will play a major role in the future of investing
Just the Beginning
But the discovery and release of DIT and DIs was not the end of our research effort; it was just the beginning. As we worked with Dynamic Investments we realized that we had opened the door to a vast and virgin world of superior investment products and methods. And this was a world in which decisions are made based on the information available in market trends, not on the “guesstimates” of financial experts.
Yes, we had designed a simple Dynamic Investment that had earned an astounding 26.5% per year during the volatile period from 2008 to 2018 with less risk than simply holding an all bond portfolio - see this page. But we began to see ways in which Dynamic Investments could perform even better, not by adding risk, but by simply adding more and different ETFs to the DI’s Dynamic Equity Pool (DEP).
We also saw that Dynamic Investment performance could be improved by changing other variables in the DI design. The parameters of the Trailing Stop Loss component is one example. Also the possibility arose that performance could be improved by combining two identical DIs in a portfolio, one reviewed quarterly and one reviewed monthly, an action that would add another degree of “time-diversity” to the process. Then we began to see the potential and advantages of using Dynamic Investments as building blocks in an MPT portfolio to produce powerful “market-biased” portfolios as discussed at this link.
Introducing “Portfolio Design Science”
As we continued to study the elements and behavior of Dynamic Investments, the number of pathways for creating ever-better performing DIs and Dynamic Portfolios became overwhelming. To exploit this potential we needed add structure to this massive area of new research. We did so with the creation of a new field of study called “Portfolio Design Science” that sets standards for performing this research as well as defining the tools needed to test new ideas using scientific methods.
The NAOI Portfolio Design Institute
To enable multiple people to work together on this research we have taken the first steps toward opening the “NAOI Portfolio Design Institute”. The purpose of this organization will be to enable multiple researchers to cooperate in an effort to exploit the full power of Dynamic Investments by creating new produces based on Dynamic Investment Theory principles that can be made available to individual investors and the financial services industry.
NAOI Research - Defining the Future of Investing
Dynamic Investment Theory and Dynamic Investments are only one area of investing research in which the NAOI is engaged. We are also looking at a full spectrum of innovative investing methods that can be taught in academia at all levels. This is only possible by reducing the amount of human subjective judgments involved in the investing process and replacing them with observations of market data as we have done when developing DIT and Dynamic Investments. When investing becomes a “science” instead of an “art”, as it is today, it can be taught with the academic rigor required. We are currently working with academic partners to include in their curricula a course, or a complete program, in the NAOI developed “science of investing”.
These and other research programs give the NAOI the confidence that we are defining and developing a better future of investing. We invite interested parties to join us in this effort. To do so contact NAOI President, Leland Hevner at LHevner@naoi.org.