As you read the information on this, and previous pages in this submenu, you may have doubts. You may be thinking that the returns of Dynamic Investments are just too high and the risks are just too low to be true. It is important that the NAOI address these doubts. This page shows several of the top reasons why people tell us that DIs and Dynamic Portfolios can’t possibly work as advertised along with a summary of our responses to the skeptics.

Input from DI Skeptics and NAOI Answers

A critical elements of new product development is that it be peer-reviewed. We showed DIs to multiple financial professionals in addition to NAOI students. While individuals told us that this is the approach they needed to enter the market with confidence and without fear, some - not all - investing professional were skeptical. Listed below are examples of critical feedback and our responses.

1. The DI Performance Claimed Is Impossible!

More than one industry pro told us that the DI performance produced by our tests was impossible. For example, the NAOI Alpha DI, discussed at this link, produced the average annual returns of +25.6% for the period from 2008-2022. This type of skepticism comes from investing professionals who are “stuck” in the MPT world in which returns of this nature are not possible. People capable of “thinking differently” have validated this performance using the methods discussed at this link.

2. Dynamic Investments are Nothing New

Some financial professionals suggested that DIT was just another trend-following system and there are many in use today. We agree that these techniques have been used for decades by hedge funds to produce out-sized returns. But these methods have, correctly, been seen as too complex and risky for use by individual investors. What the NAOI has done is create an new investment type in the form of DIs that enables the individuals to take full advantage of high-performance trend-following methods in a simple, safe and low-risk manner. DIT is not just another “trend-following system”. It is a completely new approach to investing that can be safely used by all investors.

3. Short-Term Capital Gains Taxes

Investors will incur short-term capital gains taxes each time a DI sells an ETF for profit that has been held for less than a year. But to reject the DIT approach based on the potential of paying higher taxes on gains is like rejecting a higher paying job because it puts you in a higher tax bracket. If the additional gains produced by using DIs were just a few percentage points, then marginally higher taxes would be an issue. But the incremental gains of using DIs and DI-enhanced portfolios over MPT portfolios are huge – dwarfing any additional taxes incurred. Plus, most people today invest in tax-deferred retirement accounts in which taxes are not paid until money is withdrawn at retirement; and then at personal income tax rates. Short-term capital gains taxes in IRAs, SEPs, 401(k)s and other retirement accounts don’t exist, so this objection goes away. In addition to these reasons, DIT methods can be used to create ETFs, a format that shields investors from capital gains.

4. Investors Can’t “Time” the Market

This is an almost universal warning given by investing professionals to clients today and the NAOI completely agrees. Individuals cannot time the market based on subjective analysis of economic or world events with any degree of success. But Dynamic Investment Theory doesn’t ask individuals to do so. DIT is based on the theory that the MARKET can successfully time profitable trades based on historical equity price trends, and test data shows this to be true. Plus, DIs have the safeguards needed to quickly sell equities bought based on bad trade signals before major losses occur.

5. Trading Costs Will Erode Higher Returns

Several reviewers told us that the returns resulting from the use of Dynamic Investments will be severely eroded by the transaction costs related to frequent trading. This is not true for two main reasons. First, it is not uncommon for a Dynamic Investment to own the same up-trending ETF for multiple consecutive holding periods – often for over a year – so trades are few and far between. Second, and more important, most brokers today offer ETF trades with no fees and soon they all will do the same.

6. An Excessive Level of Investor Involvement Is Required

I have been told by financial mavens that too much involvement by the individual investor is required in the DI management process to make it feasible for use by the public. After all, the DIT approach requires that Dynamic Investments be reviewed periodically – typically quarterly – and trades made as signaled. The NAOI has researched this topic using feedback from NAOI students who have been using DIs for several years. They tell us that the DI management process each quarter takes from 15 to 30 minutes and is very easy to do using the step-by-step instructions found in the DI User’s Manual.  For the added gains and lower risk achieved, this is time well spent. Also note that the DI Review process can easily be automated and in the near future online brokers and financial organizations will offer this benefit.

7. Any Trading System Will Be Negated By Success

We have been warned that any “trading system” that works too well will quickly be crushed by the market. And in most cases this is true. But DIT is not a trading system. It is a fundamentally new and different approach to investing. As long as asset and market-segment prices are cyclical and different assets and market-segments move up and down in price at different times, DIT will work over the long-term. These are aspects of investing that cannot be “crushed” by overuse. If DIT is a trading system then so is MPT. Of course neither is.

8. Insufficient Test Data

The backtest period used most frequently in this booklet begins at the start of 2008 and continues through the end of 2019, a full 12 years’ worth of data. With quarterly reviews, this represents 48 data points – the statistical equivalent of 48 years of annual data and this is significant. Also, the test period used lends credibility to DIT methods as it encompassed a major stock market crash, an unprecedented bull market and several “flat” years. DIs and DPorts outperformed MPT portfolios in all of these economic conditions as DIT predicted they would.

9. Push-back From the Financial Establishment

The NAOI knows that fundamental change to how investing works today will not be easily accepted by the financial services industry. The use of MPT is too firmly ingrained in virtually every area of the industry. But it must be stressed that it is not the NAOI’s goal to replace MPT with DIT. These two methods work very well together in the form of Dynamic Portfolios (DPorts) in which DIs are used as building blocks in traditional MPT portfolios. DPorts are discussed at this link

Summary

Any change in the financial world as significant as the introduction of Dynamic Investment Theory, Dynamic Investments and Dynamic Portfolios will meet with resistance. Too many business models of financial organizations are based on the exclusive use of MPT to design and manage portfolios. As a result new investing approaches are not welcomed by the financial services industry.

But organizations that ignore DIT, DIs and DPorts do so at their own risk. By teaching the use of DIs to the investing public, demand for it will grow. Those advisors and organizations that meet this demand will attract a massive client base. Those that don’t will struggle to survive in the future of investing.

Next Up - DIT Support Resources and Working with the NAOI

Learn about the DIT and DI support resources provided by the NAOI as well as the various ways that financial organizations can work together with the NAOI at this link.