Up to this point in the Slideshow I have shown the performance potential of the ultra-simple Core DI that rotates only between one Total Stock Market ETF and one Bond ETF. While the returns produced are incredible, we can do better. An amazing thing about DIs is that returns can be increased, without increasing risk, by simply adding more - or different - ETFs to the DEP. A design that demonstrates this amazing capability is one that we call the NAOI Alpha DI. It is discussed and analyzed below.

The NAOI “Alpha” DI Design

The NAOI Alpha Dynamic Investment holds just three Exchange Traded Funds in its DEP. They are as follows:

  • SmallCap Growth Stock ETF

  • Momentum Stock Index ETF (first available in 2013)

  • Long-Term Treasury ETF

The names of the ETFs used are revealed to NAOI clients and students.

The table below shows the performance of the NAOI Alpha DI as compared to that of the NAOI Core DI, discussed previously that has only two ETFs in its DEP. The test period is from the start of 2008 to the end of 2018. A Quarterly Review Period was used.

The sharpe ratio is a measure of how much return is gained for each unit of risk taken - the higher the better

The sharpe ratio is a measure of how much return is gained for each unit of risk taken - the higher the better


You can see that by simply adding the Momentum Index ETF, the performance of the Alpha DI was increased significantly while the risk, for each unit of return gained, as measured by the Sharpe Ratio, actually went down!

Performance Breakout

Let’s look at some astounding statistics related to the Alpha DI performance:

  • Number of Days each ETF was Held (Remember, a DI holds only one ETF at a time - the one that is trending up in price most strongly at a Review event.)

    • SmallCap Growth ETF - 1194 days

    • Long-Term Treasury ETF - 1012 days

    • Momentum Index ETF - 563 days

  • Positive Return Quarters: 35 (79.5%)

  • Negative Return Quarters: 9 (20.5%)

  • Number of Times the Trailing Stop Loss of 7% was Triggered: 2

  • Number of Trades: 16 in eleven years

What MPT portfolio or any other type of investment showed this level of performance? The answer is NONE.

The Value and Uses of the Alpha DI

As of this writing, the Alpha DI provides the best combination of simplicity (using only 3 ETFs) and performance (returns + risk) of any Dynamic Investment the NAOI has designed. And it can be implemented and used TODAY with NAOI training. Thus we suggest its use for the following purposes:

  • As the NAOI “Default” DI - This is the DI that we recommend that NAOI students use to get started with Dynamic Investing. It can either be used as a standalone portfolio or as a building block in an MPT portfolios as discussed on Slide 6 that follows.

  • As a Portfolio Performance Benchmark - The Alpha Dynamic Investment performance is an indicator of the returns potential that the market was making available for any given time period. The Alpha DI was able to capture these gains without human judgments involved. Investors of all experience levels could have implemented and managed it on their own using an online broker. Thus, any portfolio that produced lower performance than the Alpha DI must be seen as an inferior investment. Finally, a logical portfolio performance standard exists!

    The NAOI would now suggest that a new measure of “investing alpha” be defined as incremental performance above the NAOI Alpha DI returns as shown above.


Updating the NAOI Alpha DI

The NAOI is constantly looking for new combinations of ETFs to place in a DI’s DEP that will produce even higher performance than the Alpha DI discussed above. Our only criteria is that it remain simple; containing four or less ETFs in its DEP. When we find a superior design, the NAOI will update our ALPHA DI. When this event happens, we will immediately notify people of the new design via the NAOI Updates List that can be joined by completing the form at the bottom of any page on this site.

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