As the NAOI worked with Dynamic Investment Theory and Dynamic Investments over a span of multiple years, we saw open before us a vast new world of superior investing products, methods and applications. Once outside of the Modern Portfolio Theory (MPT) “box”, all manner of positive investing outcomes, seen today as impossible, suddenly became real.
New Investing Concepts Resulting from the Use of Dynamic Investments
Here are just a few of the new investing concepts that DIT and DIs spawn.
The Productization of Investing - MPT portfolios are customized to match the risk tolerance of each investor. Dynamic Investments are solely focused on capturing the positive returns potential that the market offers at all times. They don’t need to be customized for each investor. As a result, Dynamic Investments can be seen as “portfolio products” that, once designed, can be purchased via catalogs from a variety of vendors. And once purchased they are “plug-and-play” investments that automatically signal trades, if needed, on a periodic basis (quarterly is the most common Review period). The productization of investing has been described as the “Holy Grail” of investing. With the introduction of DIT and Dynamic Investment, the NAOI has found it.
The Introduction of Market-Sensitive Investments / Portfolios - MPT portfolios are static investments; blind to market movements. As a result, their value drifts up and down with the tides of the market and they are dangerously exposed to market crashes. In contrast, Dynamic Investments and Dynamic Portfolios constantly monitor market trends in order to take advantage of price uptrends while avoiding downtrends and crashes. As a result they are capable of producing returns that are significantly higher than MPT portfolios with lower risk and absolute protection from market crashes. The NAOI knows from experience that “protection of wealth” is the single most important factor that will draw them into the market as confident investors.
From an Art to a Science - Today, equity trading decisions are made based primarily on subjective human judgments. As a result investing today can be most accurately described as an “art” rather than a “science”. In contrast, DIT trade decisions are based on objective observations of empirical market data using a well-defined set of repeatable rules - in other words, DIT is a “science”. Investing, as a science, can be taught. Investing as an art, cannot. The effects of this transformation are enormous.
Reducing the Human Risk Element - MPT provides no guidance on how to change the equities it holds to maximize returns and minimize risk. Therefore, trade decisions are made based on subjective human judgments. This opens the door to all manner of negative factors such as sales bias, incorrect forecasts, emotions such as fear and greed, account churning and even frauds and scams. In contrast DIT based trade decisions are made based on a firm set of rules related to observations of empirical data. As a result, all of the negative factors mentioned above go away.
Additional Levels of Diversification - MPT gives investors two levels of diversification to reduce risk in the form of Company Diversification and Asset Diversification. Both reduce risk but also reduce returns. DIT uses both of these diversification factors and adds two more as follows:
Time Diversification - Dynamic Investments specify and require periodic reviews and, if needed, changes the equities they hold to take advantage of current market dynamics. This adds “time-diversity” to the DI and it not only reduces risk but also enhances returns.
Method Diversification - On Slide 04 we discussed MPT / DIT Hybrid Portfolios. They hold at least one Dynamic Investment in a traditional MPT, asset-allocation portfolio. Thus, NAOI Hybrid Portfolios utilize both a buy-and-hold and a buy-and-sell methodology. This is “method-diversification” and it also both reduces portfolio risk and enhances portfolio returns.
The Ease of New Product Creation - Dynamic Investments are created by simply combining existing ETFs (or mutual funds) in the DI structure as discussed on Slide 03. Thus, powerful new DIs can be created without the massive time, effort, expense and risk of market-acceptance related to the creation of new ETFs or Mutual Funds. And these new DIs will have higher returns with less risk than virtually any standalone investment or MPT portfolio. Even individual investors, trained by the NAOI, can create powerful Dynamic Investments on their own. The implications of this change are massive.
A New World of Product Development Opens - New investing developments today move the field sideways not forward. They simply assume that they will be used in an MPT-based world of investing. DIT breaks out of the MPT box and by doing so a vast world of new and better investing products and methods is revealed. DIT developments move the world of investing forward. The NAOI has created a structure and test platform for DI development. We call this field of knowledge and investigation “Portfolio Design Science”.
These are only a few of the many game-changing benefits that emerge in the new DIT-based world of investing. NAOI training and consulting as discussed on Slide 09 show how to take advantage of this new world of opportunities starting today.