The Dynamic 401(k) Solution
The future of 401(k) Plans is bright due to the introduction of Dynamic Investments (DIs). Presented on this page are just a few of the ways in which employee benefit plans will be enhanced by the use of DIs. Each is discussed in detail in Chapter 9 of The Dynamic Investment Bible.
Higher Return, Lower Risk Investment Choices
Empirical observations show that Dynamic Investments are capable of producing returns that can more than double those of traditional, asset-allocation portfolios in use today. And these returns come with far less risk. Superior performance is the first and most obvious benefit of using DIs in a 401(k) Plan portfolio. There are others.
Less Education Needed
DIs are very simple portfolio “products” that can held for the long term without customization for each investor. Each has the universal goal of owning only ETFs that are moving up in current economic conditions and avoiding those that are moving down.
Also, because the one ETF held by a DI at any one time changes automatically based on market observations, investors need not concern themselves with making trade decisions based on economic / world events or subjective "expert" recommendations. The market is doing all of the analysis needed to automatically signal trades by observing market trends. Thus, minimal investor education, and NO human decision making, is needed to manage DIs effectively. This solves the massive problems caused by the inferior investor education that exists in the 401(k) world today. DIs also eliminate the risk of human analysis errors.
Dynamic Investments use ETFs as their primary investment vehicle resulting in lower fees for 401(k) Plan participants. The management fees for ETFs can be up to ten times lower than those for similar Mutual Funds.
A Superior Default Investment
Target-date funds and similar investments that simply, and blindly, increase portfolio allocation to bonds as an investor gets older are a disaster when used as default investments for 401(k) Plan participants. In today's markets bonds can be a more risky investment than stocks. How? For one reason, because when interest rates go up, the price of bonds goes down and there is only one way for interest rates to go right now. As a result, today's typical Target-Date fund or ETF is putting a lot of people nearing retirement at great risk as their retirement portfolios become heavily investing in bonds.
A far superior default investment is the simple NAOI Basic Market-Biased Portfolio, described in Chapter 9 of The Dynamic Investment Bible, and summarized via an example below. This unique portfolio product changes its stock/bond allocation (or bias) automatically based on periodic sampling of market trends.
The NAOI Market-Biased Portfolio - An Example
Market-Biased Portfolios are the perfect investment product for a 401(k) Plan or any other retirement plan. They are incredibly simple and extremely safe - yet they provide higher returns over the long term than virtually any MPT portfolio or Target-Date ETF in existence today.
A simple Market-Biased Portfolio holds two static investments with equal allocations to each: e.g. 25% allocation to a Stock ETF and 25% allocation to a Bond ETF. These ETFs are simply bought and held. Also in the portfolio is the Primary Dynamic Investment (discussed on this site's Home Page) that automatically and periodically rotates between two Stock ETFs and a Bond ETF based on market trends. Thus a Market-Biased Portfolio will hold an allocation of 75% Stocks / 25% Bonds when stocks are moving up, and 75% Bonds / 25% Stocks when stocks are moving down. And no subjective human judgment involved in the management process - all changes are based on objective, empirical market movements. At the end of each year calendar year allocations are reset to the original percentages.
The figure below illustrates the Primary Market-Biased Portfolio structure for this example with allocations to the three investments involved.
- Average Annual Returns of this portfolio for the years 2007-2016: +19.5%
- The Sharpe Ratio of this portfolio for the years 2007-2016: 1.21
- MPT 60% Stock / 40% Bond Average Annual Returns for the same period: +7.9% with a Sharpe Ratio of 0.56
Note that the Sharpe Ratio is a measure of how much return is achieved for each unit of risk taken; the higher the better. And any number above 1.0 indicates a superior investment. In other words the +19.5% average annual return for the Market-Biased Portfolio DID NOT come with high risk!
Who would not have wanted to own this portfolio during the test-period used? This is a period that included a massive stock market crash in 2008. During that year this dynamic portfolio automatically changed it allocation to be heavily biased toward bonds. When the market started to recover in 2009 the bias automatically switched to a stock bias where it has remained for most of the past 9 years. Should the stocks start to swoon again, this market-biased portfolio will automatically switch back to a bond bias - its just that simple.
You will note that holding a traditional, buy-and-hold 60% stock / 40% bond MPT, asset allocation portfolio for the same period earned a very mediocre return with much higher risk.
The superiority of an NAOI Market-Biased Portfolio in a 401k or any other retirement plan account is obvioius.
Higher Employee Participation Rates
Simplicity, higher returns, less risk and absolute protection from market crashes; all of these are benefits of using Dynamic Investments in a 401(k) Plan portfolio. As a result, companies that offer DIs and Dynamic Market Biased Portfolios in conjunction with an NAOI Education Program can expect close to 100% employee participation rates. And Plan Providers that offer DIs will have the competitive advantage needed to capture a significant share of this multi-billion dollar market.
An Opportunity for 401(k) Plan Providers!
The NAOI will make HR Departments and employees around the country aware of the Dynamic Investing approach to 401(k) Plans. When they learn about the simplicity and performance of Dynamic Investments and Market-Biased Portfolios, employees will demand them. The Plan Provider that offers DIs will capture a significant share of this multi-billion dollar market. Those that reject change and continue to offer traditional MPT portfolios and investments such as Target Date Funds will lose market share rapidly.
It is time for the 401(k) market to evolve. DI's are the new investment type that enables this to happen!
Get Started with an NAOI Consultation
The NAOI is available to consult with and train both companies that offer 401(k) plans to their employees as well as organizations that provide and manage these 401(k) plans in order to take maximum advantage of NAOI Dynamic Investments. Click here for more information on the support resources we provide. And click here for contact information.