There is an intense debate roiling the financial industry today related to the merits of passive investing versus active investing. The topic was front and center in the Wall Street Journal of 10/19 under the title “The Dying Art of Picking Stocks”. In this blog post I show that choosing between one or the other of these investment approaches is totally unnecessary. NAOI Dynamic Investments give you the best of both.
First, a couple of definitions. "Passive" investing typically entails simply buying and holding index funds or ETFs. "Active" investing involves buying equities based on human analysis and judgments - essentially "stock picking". There are advantages and disadvantages to each approach. Thus the argument about which is better.
In current markets the trend is definitely in favor of passive investing. According to Morningstar, over the three years ended Aug. 31, investors added nearly $1.3 trillion to passive mutual funds and Exchange Traded funds while withdrawing more than a quarter trillion dollars from active funds.
Performance is driving the shift from active to passive investing. Over the decade ended June 30, between 71% and 93% of active U.S. stock mutual funds, depending on the type, have either closed or under-performed the index funds they are trying to beat, again, according to Morningstar. Another reason for the shift of investment money is that passive investment expenses are significantly lower than those of active investments and there is no correlation between higher fees and higher returns.
Yet, advocates for passive investing must admit that even though index funds have historically outperformed actively managed funds, their returns are modest at best. An investor holding a Stock Market index fund or ETF that tracks the S&P 500 index, for example, would have earned an average of only 6.5% per year during the past decade - with relatively high risk.
Active funds have the potential to earn far higher returns as they can change their holdings to take advantage of uptrending markets and to avoid down trending markets. The problem here is that human analysts are pretty bad at predicting future market movements. Most of their analysis is little better than "guessing" and the risk of losing money is significantly higher than investing in index funds where no human judgments are involved.
So investors are faced with a dilemma - do they accept the low returns of passive investing along with the risk of suffering significantly losses in market crashes. Or do they "role the dice" with active fund managers and essentially bet their money that there predictions are accurate. It seems there is no easy answer to this question.
The Solution: NAOI Dynamic Investments
The entire passive/active investment management decision problem is solved by the introduction of a next-generation investment type by the NAOI called Dynamic Investments (DIs) that are explained on this site (www.DITheory.com). DIs provide the best elements of both active and passive management while minimizing the downside elements of each. Let's see how.
Passive Management of an Active Investment
NAOI Dynamic Investments are active investments. They automatically change the ETF they hold based on a periodic sampling of market trends. Trades are made based on empirical observations of market movements, not on human judgments. The NAOI designed DIs under the assumption that future market movements can best be predicted by the market itself. In other words that the "market" is far smarter than any analyst can hope to be.
The ability of the market to accurately predict its future movements by periodic trend sampling is proved by the performance of the simplest possible DI that rotates only between a Stock Index ETF and a Bond Index ETF. When this DI reviews the market it looks at the trend of each of these ETFs and buys only the one moving up most strongly at the time. This ETF is held until the next review – typically quarterly – when the trends of each ETF are checked again and the ETF held is changed if the signal so indicates.
This simple “Core” NAOI Dynamic Investment earned an average annual return during the period from 2007-2015 of +28%.
No human judgments were involved in the management process of this, or any, Dynamic Investment – trades were made automatically based on empirical observations of market movements using a simple trend indicator. And this DI was exposed to far less risk than virtually any MPT, buy-and-hold, portfolio during the period. In fact, it earned +33% during the market crash of 2008.
What we have in DIs is an active investment capable of taking full advantage of the positive returns potential that exists in the market - but without active management. Trades are signaled automatically by the DI's trend indicator.
In other words, DIs are a passively managed, active investment and the the need for investors to choose between active and passive management goes away!
Dynamic Investments are the Future of Investing!
We, at the NAOI, are confident that Dynamic Investments are the future of investing. When the public learns that Dynamic Investments produce significantly higher returns with less risk than virtually any single equity or traditional MPT, asset-allocation portfolio, they will demand them. The financial organizations that meet this demand by offer DIs will thrive in the future of investing. Those that reject change and don’t offer DIs will lose market share rapidly.
Contact the NAOI for more information on Dynamic Investments and how you can begin to use them, or offer them, today!
Or, better yet, purchase a copy of the NAOI Dynamic Investment Bible to learn how to start using Dynamic Investments immediately.