The design of Dynamic Investments opens a vast world of powerful product development. Each of the variables discussed on Slide 04 can be modified to meet specific investor needs. The NAOI has found that the most productive research can be done by assigning to the Review Period, Trend Indicator and Stop Loss variables an optimized default value. This frees researchers to concentrate on the equities to place in the Dynamic ETF Pool (DEP). This is where DI designers identify the assets and/or areas of the market where the DI will search for price uptrends.

Dynamic Investment Types

To add structure to DI Design Research, the NAOI has defined four Dynamic Investments “types” depending on the contents of there DEPs. They are listed below. along with an example of each and performance numbers for an DI with the defined DEP for the period from 2008 to 2018, inclusive. Remember, ETFs in the DEP are merely candidates for purchase by the DI. The “market” selects the ONE equity to own - for one Review Period - based on the strength of its price trend.

Keep in mind as you read this information that DIs can either be used as standalone portfolios or as building blocks in an MPT portfolio as discussed on Slide 07.

Multi-Asset DIs : Stocks, Bonds

This DI type holds in its DEP equities that track both a Stock and a Bond index. (Note that In this and following examples I will use Exchange Traded Funds as the equity type - they could also be mutual funds.) Thus, this DI, at any one time, will hold either Stocks or Bonds based on which is trending up most strongly in price at a Review event.

Slide 5 Multi-Asset.png

You can see that during the backtest period Stocks where hold for 1633 days and Bonds for 1136. And you can see that the average annual returns for this simple Core DI were astounding. MPT portfolios that held both Stocks AND Bonds during this period earned an average annual return of between 7% and 9% per year.

This DI type can be the only investment an investor holds in their portfolio as it is both company and asset diversified.

Asset-Class Focused DI : Stocks

MPT portfolio designers today will almost certainly include a Stock component in the portfolios they create. But what type of Stock? The options include SmallCap, MediumCap, LargeCap and for each either Growth or Value. In the face of such choices most MPT portfolio designers simply include a Total Stock Index ETF or Fund. But by doing so they leave a lot of potential return out of the portfolio. An Asset-Class Focused DI, as illustrated below, enables the DI designer to include multiple stock type candidates in the DEP and then let “the market” select this one that is trending up most strongly at a Review Event.

Slide 5 Stock Focused.png

In this example the DI could select from 3 stock types depending on the price trends of each. Note the days that each was owned during the backtest period. All Asset-Focused DIs also include an “escape valve” ETF, in this case a Bond ETF, that is purchased if the entire Stock asset class is moving down in price. You can see the amazing average annual returns of this Dynamic Investment for the backtest period. Just owning a Total Stock ETF for the period would have earned +7.2%.

This type of DI is typically used as an MPT portfolio building block as discussed on the next slide.

Market-Focused DIs : Stocks, Bonds, Financials, Technology

This type of DI holds multiple Market Segments in its DEP along with a Stock and Bond “wrapper”. Thus, it owns either a Financial Sector ETF or a Tech Sector ETF only when either is moving up in price more strongly than Stocks or Bonds. And, when this is the case, it select between the Financial Sector or the Tech Sector based on the same criteria.

Slide 5 Market Focused.png

Note how many days each Market Sector was held during the backtest period. Buying and holding these Sector ETFs as standalone investments would have resulted in very low returns with very high risk. This DI type is typically used as an MPT portfolio building block.

Multi-Focused DI : Stocks, Bonds

Our final DI Type has in its DEP multiple Stock types and Multiple Bond types. Thus the DI either holds a Stock or a Bond ETF at any one time and within that asset-class the strongest uptrending Stock or Bond type.

Slide 5 Multi-focused.png


You can see that the use of Dynamic Investments by portfolio designers makes their job much easier than it is today. They decide which “groups” of equities to place in the DEP and the “market’ decides which is the best buy in current market conditions.

The NAOI has a catalog of optimal DI designs in for each of these types that can be used today. Refer to Slide 13 for more information on how to gain access to them. And researchers have a fast field of opportunities to design their own with NAOI training - again see Slide 13 for DI Design Classes offered by the NAOI.

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