Here is how the NAOI found and developed Dynamic Investment Theory as a viable alternative to Modern Portfolio Theory

From Education to Research and Development

In 2008, after a decade of teaching MPT portfolio design methods, the NAOI stopped our education activities. When the markets crashed in that year we watched in dismay as the portfolios we were teaching our students to create crashed with it. At that point Leland Hevner, NAOI President, refocused corporate resources from education to research and development.

Starting with Investor Goals

We began our research by understanding what the investing public needed to become more confident investors. I was determined that a new approach would be designed to meet their specific needs. Fortunately the NAOI has access to thousands of average people with money to invest who are NAOI members that we could easily survey. We found that their top goals for a new approach were as follows:

  • Easy to understand, implement and manage; allowing for individuals to implement and manage on their own if they wish

  • Provide higher returns than MPT portfolios and with lower risk

  • Lower expenses and fees

  • Absolute protection from market crashes

  • Be comprehensive; not only specifying which equities to work with but also how to manage them on an ongoing basis

We quickly saw that MPT met none of these goals so we started with a blank slate; as if MPT didn't exist.

Data Analysis

the cyclical nature of equity prices

the cyclical nature of equity prices

To meet our design goals we analyzed historical market price data looking for patterns that were predictive of future prices. Our analysis led us to one very clear conclusion.

The only thing we can know about market prices with a high degree of certainty is that they are cyclical and that different asset classes and different markets move up and down at different times as illustrated at right.

Developing a Premise

Based on this observation we arrived at the following Premise:

At all times and in any economic conditions there exist areas of the market that are trending up in price. It is possible to create an investment type that is capable of automatically detecting these areas and capturing their positive returns potential while avoiding areas that are trending down in price.

The next step was to test the validity of our premise.

Testing and Creation of a Theory

Over a multi-year period we tested a large number of prototype investment designs and found one that showed our premise to be true with a high degree of probability. We called it the NAOI Dynamic Investment (DI). At that point, we transformed our Premise to a Theory that we called Dynamic Investment Theory (DIT). It met every goal set for us by the public.

Breaking New Ground

The NAOI understands that the observation that equity prices are cyclical and that uncorrelated assets move up and down at different times is not a new discovery. Market cycles and momentum investing have been studied and used for years. The significant breakthrough that the NAOI made was the design of a revolutionary investment type called Dynamic Investments and a related management strategy that enables average people with money to invest to easily transform this information into profitable investing actions through the use of NAOI Dynamic Investments are discussed on the next slide.

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