To Evolve the World of Investing
We Must “Think Differently”
Investing Today Is “Stuck”
For decades we have been taught that there is only one way to invest. That is by using Modern Portfolio Theory (introduced in 1952) to create portfolios customized to match the risk tolerance of each investor via asset allocation methods. Then we are advised to hold these portfolios for the long-term with occasional rebalancing. Disagreeing with this approach is treated as a crime by financial regulators.
So, the world of investing today is stuck in the 1950’s and we, as individual investors are paying a steep price in the form of portfolios that produce low returns, high risk and dangerous vulnerability to market crashes.
The NAOI Is Moving Investing Forward
On this Web site you have learned that MPT is not the only way to invest and not even the best. Here the NAOI has presented a different approach to investing called Dynamic Investment Theory (DIT). DIT creates Dynamic Investments (DIs), a new investment type designed to capture positive returns wherever and whenever they exist in the market based on a periodic sampling of asset class and/or market segment price trends. DIs don’t care about your risk profile. They only focus on maximizing profits and minimizing risk in all economic conditions. This is universal goal shared by all investors and, thus, no portfolio customization for each investor is needed.
Extensive testing by the NAOI has shown that the DIT approach creates investments and portfolios that can consistently and significantly perform better than any MPT portfolio for the same time period. Examples of this performance have been presented throughout this site - here for example. And we have shown that once the “chains” of MPT are broken all manner of positive outcomes that today’s experts will say are impossible suddenly become probable.
The NAOI believes that Dynamic Investments will play a significant role in defining the future of investing. As a result, investors and investment sellers will need to start “thinking differently” in order to take full advantage of this change.
Thinking Differently in a DIT-based Future of Investing
Below are listed areas of investing that change significantly when Dynamic Investment Theory (DIT) is used to create portfolios instead Modern Portfolio Theory (MPT). Note that in this list I will refer to the output of DIT methods as “portfolios” for purposes of comparison. But keep in mind that the investing products created can also be referred to as “dynamic investments”. DIT blurs the lines between single investments and portfolios. A Dynamic Investment holds multiple ETF “candidates” in its Dynamic Equity Pool but only owns one at a time. So DIs have elements of both a traditional portfolio and a single equity. This is your first example of needing to “think differently” in the coming DIT-based world of investing. Here are some more:
The Portfolio Holding(s)
MPT portfolios are designed to hold both winning and losing investments at all times to reduce risk; but this also reduces gains.
DIT investments are designed to hold only winning investments at all times to both reduce risk and increase gains.
The Investing Approach Scope
MPT is a theory that simply shows how to match a risk tolerance level to a portfolio asset allocation that matches it. MPT provides no guidance for how to manage a portfolio on an ongoing basis; such as if or when to rebalance it. Management actions are left to subjective human judgments. Thus, MPT is not a comprehensive approach to investing.
DIT not only provides guidance for determining which equities to work with but also sets rules for how these equities are to be managed on an ongoing basis. Thus, DIT is the market’s first comprehensive approach to investing.
The goal of an MPT portfolio is to match the risk tolerance of each investor. Each must be customized.
DIT portfolios are designed to find and capture the positive returns, wherever and whenever they exist in the market. Their goal is to maximize returns and minimize risk. There is no need to customize these portfolios for each investor. This fact makes DIT-based portfolio design far simpler than MPT portfolio design and leads to the massive benefit discussed next.
The Productization of Investing
As mentioned above, MPT portfolios are customized for each investor. As a result they cannot be standardized and “productized”.
DIT portfolios have the universal goal of maximum returns with minimum risk in all market conditions - no customization is needed for each investor. As a result DIT portfolios can be treated as “products”; capable of being sold “off-the-shelf” from a variety of vendors. This “productization of investing” will have a massive and beneficial impact on how investing works today.
Additional Diversification Factors
MPT portfolios use both Company Diversification and Asset Diversification in order to reduce risk.
DIT portfolios also use Company and Asset Diversification but they also use two more as follows:
Time Diversification is used by requiring a periodic review of DI’s holding and making changes as necessary
Method Diversification is used when creating MPT/DIT Hybrid Portfolios that employ both a buy-and-hold and a buy-and-sell management strategy.
Time and Method Diversification both reduce risk AND enhance returns.
Returns and Risk
MPT states that higher returns are only possible by assuming higher risk
DIT disagrees. It states that higher returns can be achieved without higher risk by placing more and different ETFs in a Dynamic Investment’s Dynamic Equity Pool (DEP).
MPT portfolio trades, other than automatic rebalancing, are made primarily based on human subjective decisions.
DIT portfolio trades are made based on the objective observation of empirical market data that history has shown is a far more accurate predictor of future equity prices than human advisors or analysts.
Stock Market Crash Protection Tools
MPT portfolios mitigate losses in the event of a market crash by holding both stocks and bonds; i.e. uncorrelated assets.
DIT portfolios are protected from significant value loss during a stock market crash via the use of Trailing Stop Loss Orders. In addition DIT portfolios are able to quickly sell stocks if they are trending down in price at a periodic review and move to holding bonds. This enables them to not only to avoid losses but to actually profit from stock market losses.
Ease of Design
MPT designers select equities to place in a portfolio based on subjective judgments that are prone to all manner of errors. Any mistakes made here have a long-lasting effect as MPT portfolios are meant to be bought and held.
DIT designers select “groups” of equity candidates to place in a DI’s Dynamic Equity Pool and then let the “market” select which to buy, or hold, based on an periodic and objective sampling of price trends. History has shown that the market is far better at selecting winning investments that any financial advisor or market analyst.
Greater Performance Potential
The DIT approach is capable of delivering performance that MPT portfolios can’t match and with lower risk. As an example, using the same two ETFs - one for Stocks and one for Bonds - the different approaches produced the following performance for the period from 2008 to 2018:
MPT using a 60% allocation to Stocks and a 40% allocation to Bonds and a buy-and-hold strategy
- Average Annual Return: +7.9%, Sharpe Ratio: 0.64
DIT holding only the one ETF that is trending up most strongly at the time of a quarterly review
- Average Annual Return: +26.5%, Sharpe Ratio: 1.10
The list could go on and on. But the above points are sufficient to show that when DIT instead of MPT is used as a basis for building and managing a portfolio, many investing concepts and outcomes that we now take as a “given” change dramatically and for the better. The use of DIT requires both investment buyers and sellers to “think differently”. And considering the complexity and risks of the way investing works today, it is about time.