The National Association of Online Investors (NAOI) has just released a new, next-generation investment type called Dynamic Investments (DIs) that provides to investors much higher returns with lower risk than the traditional asset-allocation portfolios in use today. To accomplish this, DIs are able to automatically change the Exchange Traded Fund (ETF) that they hold based on a periodic sampling of market trends. By purchasing only ETFs that are trending up and selling, or avoiding, those that are trending down DIs can produce high return / low risk performance that today’s financial experts will say are impossible.
In this Blog Post I want to show the difference between how we are taught to invest today and how we will invest in the future.
Investing Today – MPT Portfolios
Today almost all portfolios are designed based on a set of rules called Modern Portfolio Theory (MPT). MPT shows how to adjust the risk of a portfolio by changing its allocation of money basically between the stock and bond asset classes. According to MPT, a higher allocation to stocks should result in higher returns but with more risk. More conservative portfolios should have a higher allocation to bonds.
Below is an example of the simplest MPT portfolio possible that contains only stocks and bonds. I will use the following Exchange Traded Funds (ETFs) to represent each asset class:
- SPY – An ETF that tracks the S&P 500 stock index
- TLT – An ETF that tracks long-term government bonds
A typical “moderate risk” MPT portfolio may have the following allocations of money:
- 60% SPY
- 40% TLT
Below is how this portfolio performed during the past decade from 2007 to 2016 using MPT’s buy-and-hold strategy. (Note that the Sharpe Ratio is a measure of how much return is received for each unit of risk taken; the higher the better. A number over 1.0 indicates a superior investment.)
- Average Return per Year: +7.5%
- Sharpe Ratio: 0.53
This is a level of return that we, as individual investors, have been told is one that we should be very satisfied with. And, of course, it is better than simply holding conservative bonds. But is this the best we can do? The answer is a resounding NO! The market during this period was offering to investors far higher returns potential, but “static” MPT portfolios were not able to capture it. NAOI Dynamic Investments could and did as explained next.
The Investment of the Future – Dynamic Investments
Let’s now use the same ETFs to build a simple NAOI Dynamic Investment. To do this we simply place SPY and TLT in what we call a Dynamic ETF Pool (DEP). ETFs in a DEP are “candidates” for purchase by the Dynamic Investment. The DI samples the price trend of each ETF in the DEP on a quarterly basis and buys only the ONE that is trending up most strongly at review time and holds it for one quarter until the next review and DEP ranking.
You can see that unlike static MPT portfolios, DIs are sensitive to market movements, capable of quickly switching between stocks and bonds based on empirical observations of asset trends. And this change is made automatically without the interference of human judgments.
Here is the performance of this simple DI during the decade from 2007 to 2016:
- Average Return per Year: +16.3%
- Sharpe Ratio: 0.91
This simple Dynamic Investment almost doubled the return of the MPT portfolio using the same ETFs! And it did so without additional risk as indicated by the Sharpe Ratio also almost doubling as well. Financial “experts” will say that this is impossible. And it is impossible using MPT methods. But DIs are a whole different ball-game and old rules and limitations no longer apply. The performance expectations for Dynamic Investments are much higher than those for static, buy-and-hold, MPT portfolios.
Wait - It Gets Even Better
The simple, 2-ETF Dynamic Investment shows that by using an intelligent, buy-and-sell strategy investors can capture the positive returns potential that exists in BOTH the Stock and Bond asset types at different times. But the DI structure enables us to find even more positive returns. I can put four ETFs, as shown below, in the DI’s DEP and allow it to search for even more returns potential during the test period. Let's use these ETFs and search for positive returns in four areas of the market instead of two:
- RPV – Large Cap Value Stocks
- RPG – Small Cap Growth Stocks
- TLT – Long Term Treasury Bonds
- EDV – Longer Term Treasury Bonds
Here is the performance of this slightly expanded DI for the period from 2007 – 2016:
- Average Return per Year: +30.6%
- Sharpe Ratio: 1.19
This is not a misprint. These are actual returns achieved by a DI that was allowed to search 4 areas of the market for positive returns on a quarterly basis. And adding even more ETFs to the DEP can possibly result is still higher returns depending on the skill of the designer. The flexibility and returns generation power of the DI structure is something the world of investing has never before seen!
Summary – No Contest
Comparing the performance numbers of an MPT portfolio with those of an NAOI Dynamic Investment - using the same ETFs for each, shows that the NAOI Dynamic Investment approach is a clear winner – it is no contest.
DIs perform better because they are time-diversified and sensitive to market movements. MPT portfolios are static and have no such sensitivity. DIs are intelligent, able to find and capture the returns potential that the market is making available at all times; MPT portfolios are “dumb” and have no capacity to change their holdings based on market movements. And DIs are designed to hold only one uptrending ETF at a time; MPT portfolios are designed to hold both winning AND losing equities at all times. All of these factors and others contribute to the fact that DIs are a superior investment and represent the future of investing.
Make 2017 Your Best Investing Year - Starting NOW!
To learn how to use DIs today, purchase The Dynamic Investment Bible by clicking the link. Also signup to receive NAOI email updates at the bottom of this and every page on this site.
Let’s make 2017 your most successful investing year ever – regardless of what the economy or the markets do!