The NAOI knows perhaps better than anyone that change does not come quickly in the financial world. While holding only Dynamic Investments in a portfolio can be a very profitable decisions, NAOI students have shown a strong preference for easing-in to this new dynamic investing approach. This is very easy to do with what we call NAOI Hybrid Portfolios that hold both “static’ building blocks and at least one “dynamic” building block. An example is shown below.

NAOI Hybrid Portfolio Configurations and Performance

The simplest possible Hybrid Portfolio will contain one Dynamic Investment and two standalone, buy-and-hold ETFs. Let’s use the following building blocks in a quick example:

  • The Alpha Dynamic Investment - The NAOI has designed a simple, high performance DI that we call the “Alpha Dynamic Investment” that has the following ETF types in its Dynamic ETF Pool (DEP) and rotates between them quarterly based on the price trend of each:

    • Large Cap Value ETF

    • Small Cap Growth ETF

    • Long-Term Treasury Bond

  • Static, Buy and Hold Stock ETF - Total Stock Market

  • Static, Buy and Hold Bond ETF - Long-Term Treasury Bond

The Table below shows multiple allocations for each of these building blocks in a Hybrid Portfolio. The top data row is a 100% MPT portfolio and the bottom data row is 100% Dynamic Investment portfolio. The rows in-between show allocations and performance for Hybrid portfolios that utilize both MPT and DIT methods. For each allocation-set the final two columns show average annual returns and risk for the period from 2008 to 2018.

Slide 6 Transition Portfolio B.png

This chart very clearly shows how even a small allocation of money to a Dynamic Investment can significantly increase the returns of an MPT portfolio without additional risk as evidenced by the increased Sharpe Ratio. It also shows how investors and advisors can transition from MPT to DIT methods in a controlled manner.

The NAOI “Market-Biased” Portfolio

Let’s focus on the row in the Table that is shaded in yellow. It has a 50% allocation to the Alpha DI and a 25% allocation to both a Stock and a Bond ETF. We call this configuration the NAOI “Market-Biased” portfolio.

This powerful configuration results in a 75% allocation to Stocks, 25% allocation to Bonds when the stock market is trending up and a 75% allocation to Bonds, 25% allocation to Stock when the Bond market is trending up. The portfolio asset-class “bias” is automatically changed by the DI in response to market price trends. The diagram below illustrates the possible results.

 As you can see in the performance Table above, by automatically switching its bias between Stocks and Bonds this portfolio type earned an annual return of 18.1% with a Sharpe Ratio of 1.12! And this performance was achieved with no active human decision-making involved!

A Higher “Comfort” Level

The Alpha DI in the above example, as a standalone investment, earned approximately +25% per year during the period used in the above example with a Sharpe Ratio of 1.04. But, again, NAOI students are not comfortable holding just one ETF at a time as their total portfolio. The Hybrid Portfolio in the above example holds either 2 or 3 ETFs at one time depending on it’s market bias. This is because the Stock ETF in the DI is typically not the same as the Stock ETF serving as standalone building block. Thus when stocks are trending up the portfolio will hold 2 Stock ETFs and one Bond ETF. Typically the Bond ETF in the DI is the same as the standalone Bond ETF. Thus when Bonds are trending up the portfolio will hold only two ETFs. But, of course, the composition of each building block is at the discretion of the designer.

New Portfolio Concepts

As with Dynamic Investments discussed on previous slides, today’s “experts” will say that consistent returns like this are not possible. But they are because of the following new investing concepts that Hybrid Portfolios give us:

  • A New Diversification Factor - Diversification is important when building portfolios. MPT portfolios give us Company and Asset Diversification, both of which reduce risk. Hybrid Portfolios add a new diversification factor that we call Method Diversification. Part of the portfolio uses a buy-and-hold strategy and part uses a buy-and-sell strategy. And while MPT diversification elements only reduce risk, Method Diversification both reduces risk AND enhances returns.

  • Fluid and Market-Sensitive Allocations - The MPT portfolio strives to maintain its original allocations that were designed to match the holder’s risk tolerance and determining when to rebalance these portfolios is a major problem in how investing works today. Hybrid Portfolios eliminate this problem. They are not tied to any individual’s risk tolerance so they are free to change with market trends. And they do so automatically making them “fluid” in order to take maximum advantage of current market dynamics.

It is for these reasons and others that the performance illustrated in the above example is possible.

A Default 401(k) Investment

The NAOI Market-Biased Portfolio is the perfect “default” investment for a 401(k) or other type of retirement account. Its high returns potential combined with its low risk puts today’s default investing - Target-Date Funds - to shame. And changes to the allocations of this portfolio are signaled automatically with no human judgments involved. This is how a “default” 401(k) investment should be defined.

A Vast World of Product Research and Development

In the limited space available here, I can only touch on the vast number and variety of configurations that the introduction of Dynamic Investment building blocks makes available to portfolio designers. NAOI offers DI and Dynamic Portfolio Design Training as discussed on Slide 08. The potential for major competitive advantage here is off-the-charts for those who understand and become proficient at creating portfolios that contain DIs.

The NAOI sees a future of investing in which all portfolios hold at least one Dynamic Investment. This is the “golden” building block that makes a portfolio market-sensitive and capable of producing performance that far exceeds that of any static, MPT-only, portfolio.
— Leland Hevner, President, NAOI

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