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Slide 07: New Concepts In Investing
Dynamic Investment Theory - opening new doors
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.
This slide presents just a few of the new investing concepts that emerge from the introduction of Dynamic Investment Theory.
New Investing Concepts Resulting from the Use of Dynamic Investments
A Comprehensive Theory of Investing - We are told today that investing is a “science” due to the use of Modern Portfolio Theory (MPT). This is wrong. MPT only describes a methodology for matching an investor’s risk tolerance with an optimal asset allocation. This is only a small part of the total investing process. In contrast, Dynamic Investment Theory (DIT) creates Dynamic Investments (DIs) that not only specify the equities to work with but also how they are to be managed on an ongoing basis using objective observations of market data. All trade decisions are made without the need for subjective human judgments. Thus, DIT is a comprehensive theory of investing based on scientific methodology. MPT is not.
The Introduction of Market-Sensitive Investments / Portfolios - MPT portfolios are static investment; 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 value loss and market crashes. In contrast, Dynamic Investments and Dynamic Portfolios constantly monitor market trends in order to take advantage of uptrends while avoiding downtrends and crashes. As a result they are capable of producing returns that are significantly higher than MPT portfolios and with far lower risk.
Reducing the Human Risk Element - MPT provides no guidance on how to change the equities it holds to maximize returns and minimize risk. Trades are made based on error-prone, subjective human judgments. In contrast, Dynamic Investments change their holdings periodically based on objective observations of empirical market data. The DIT methodology removes from the investing process the massive human risk element that is the source of so much that is wrong with investing today.
From an Art to a Science - Today, equity trading decisions are made based on subjective human judgments. As a result investing today can be most accurately described as an “art” rather than a “science”. DIT trade decisions are based on objective observations of empirical market data using a well-defined set of repeatable rules. As such DIT transforms investing from an “art” to a “science”. Investing as a science can be taught. Investing as an art, cannot. This transformation goes a long way toward decreasing the investing public’s unhealthy dependence on professional advisors / salespeople that exists today.
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. The productization of investing has been described as the “Holy Grail” of investing. This is what DIT delivers.
Additional Levels of Diversification - MPT gives us two levels of diversification to reduce risk; 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 are required to review and change the equities they hold, if needed, on a defined, periodic basis. This adds “time-diversity” to the DI and it not only reduces risk but also enhances returns.
Method Diversification - On Slide 06 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 portfolios risk and enhances portfolio returns.
The MPT Risk / Reward Connection is Shattered - MPT says that higher investment returns can only be obtained by assuming additional risk. DIT disagrees. It shows that higher returns can be obtained without higher risk by adding more and different ETFs to a DI’s Dynamic ETF Pool (DEP). This observation, alone, crushes the core logic of MPT.
A New Portfolio Performance Benchmark and Redefining Investing Alpha - Today there is no effective benchmark for portfolio performance and thus no way to measure if a specific portfolio is good, bad or just mediocre. DIT provides the performance benchmark needed in form of the performance of the NAOI Alpha DI discussed on Slide 05. This DI shows the level of positive returns that the market is offering to investors for any time period. Any investor could have realized these returns by simply holding the Alpha DI with no human judgments involved. Any portfolio producing lower performance for the same time period must, therefore, be seen as inferior. And with this new performance benchmark “investing alpha” needs to be redefined as the amount of return achieved above that provided by the standard NAOI Alpha DI.
A 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 04. Thus, powerful new DIs can be created without the massive time, effort and expense of creating new ETFs or Mutual Funds. And these DIs will have higher returns with less risk than virtually any stand alone investment or MPT portfolio. Even individual investors, trained by the NAOI, can create powerful Dynamic Investments on their own.
The Active / Passive Debate Ends - There is much debate today about whether active or passive management of portfolios is the better approach. DIs are active investments with passive management taking advantage of the best features of both - and this debate is rendered moot.
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 12 show how to take advantage of this new world of opportunities.