Dynamic Investment Theory (DIT) sets the logic and rules for the creation of a new investment type called Dynamic Investments (DIs). DIs are a unique investment type in the market. They consist of multiple components that enable them to identify and capture the positive returns available in uptrending asset and market segments wherever and whenever they exist in the market. DIs are the financial world's first market-sensitive investments that can be easily implemented and managed by the investing public. With their introduction, the world of investing changes and those that understand it first will benefit the most.
The NAOI Dynamic Investment Structure
The following diagram shows the structure and components of all Dynamic Investments. Each is explained below.
The NAOI Dynamic Investment Components
These components make Dynamic Investments “market-sensitive”:
Dynamic Equity Pool (DEP) - This is where a DI designer places groups of equities (typically from two to five) that are “candidates” for purchase by the DI at a Review event as discussed next. I will use ETFs as the equity type in throughout this presentation. It could also be Mutual Funds.
Review Period - This is how often the ETFs in the DEP are ranked to find the one having the strongest price uptrend. The “winner” is the one ETF purchased, or retained if already held, until the next Review event. “Quarterly” is an example.
Price Trend Indicator - This is the technical indicator used to rank the ETFs in the DEP by price trend. It is available on any of a number of free financial Web sites.
Trailing Stop Loss Order- A Trailing Stop Loss order is placed on the ETF purchased by the DI to protect its value from sudden and significant price drops during the short time it is held. A typical sell signal is a 7% or 10% price drop.
Each of these components is a variable that is defined by a DI designer to meet specific investing goals. The NAOI provides training classes for DI Designers as discussed on Slide 13.
Dynamic Investment Management
DIs are a comprehensive investment type that not only specifies the equities to work with but also how they are too be managed on an ongoing basis. The following diagram shows an example of how a DI can change the ETF it owns based on the price trend of a Stock ETF or a Bond ETF using quarterly Reviews.
You can see that the DI management process strives to hold ONLY uptrending equities while selling, or avoiding, those that are trending down. This is in stark contrast to MPT portfolios that are designed to hold both winning and losing equities at all times.
As shown on Slide 1, the simple NAOI Core DI that holds only a Total Stock and a Total Bond ETF in its DEP produced amazing returns for the volatile period from 2008 to 2018. Its performance is detailed below. The bottom row of the Table shows the performance of a traditional MPT portfolios with a 60% allocation to Stocks and a 40% allocation to Bonds. The Sharpe Ratio shown in the last column of the table is a measure of how much return was obtained for each unit of risk taken and the higher the better.
The performance of the DI, using the same ETFs as the MPT portfolio, is simply stunning.
How Is This Possible?
How are returns like produced by the Core DI possible? The answer is simple. DIs are dynamic, market-sensitive and "smart". They take advantage of the cyclical nature of asset classes, markets and market segments. In contrast, MPT portfolios are static and “dumb”. When we step outside of the MPT “box”, all manner of outcomes that are seen as impossible in an MPT-based world of investing, suddenly become real.
The Impact of Dynamic Investments
The higher returns and lower risk of Dynamic Investments give this innovative investment type the potential of dominating the future of investing. They can be held as standalone portfolios or used as building blocks in an MPT portfolio. DI building block types are discussed next.