On this site I explain the difference between the increasingly obsolete way we invest today using buy-and-hold, asset allocation portfolios and the far superior way we will invest in the future using NAOI Dynamic Investments.
Perhaps the best way to illustrate the difference in just a few words is to use as an illustration an email that I received today from a major ETF creator entitled “How to Navigate An Uncertain Bond Market.”
Attached to the email was a 6 page PDF file listing and explaining each of perhaps a dozen Bond related ETFs offered by the company. Several were designed to track the entire bond market while the others tracked more narrowly focused bond types. Among the ETFs listed for my consideration were: Total Bond Market, Government Treasuries, Agency Bonds, Mortgage-Backed Bonds, Asset-Backed Bonds, Junk Bonds, Senior Loan Bonds, Floating Rate Securities, Preferred Stock and on and on.
The document then described how investors could group these bonds into three categories and then build a diversified Bond Segment for their portfolio by allocating a percentage of money to each. It was all very complicated. As an individual investor I would not know what to do with this information. First I would have to essentially “guess” at an allocation percentage for Bonds in my portfolio, then I would have to guess at how much to allocate to each of the three suggested Bond groups, then I would have to guess at which specific ETFs to include from each of these groups. What a mess. My only option would be to pay an advisor to sort through this for me but my suspicion is that their guesses would be no better than mine and I would be paying a lot of money for them.
Now, how would Navigating the World of Bonds work using NAOI Dynamic Investments (DIs)? Let’s take a look.
As explained on this site and in book "The Dynamic Investment Bible," DIs do not use standard asset allocation methods. Various diverse assets are held in a DI’s Dynamic ETF Pool (DEP) – as explained on this site – but a DI only holds one at a time as determined by market trends. For example, a DI can be designed to hold either a stock ETF or a bond ETF but not both – so no “guesses” related to asset allocation are required. The asset type that a DI holds is determined by which asset is trending up most strongly during a quarterly review. That asset may change at the next review when the DEP is "ranked" again based on trends. Thus, DIs are dynamic and “time diversified” – a risk reduction factor not used in today's portfolios but which NAOI research has shown to be far better at reducing risk than asset allocation.
Let’s look at the simplest possible DI, one that either owns a Stock or a Bond ETF at any one time as dictated by market conditions. We call this the "NAOI Core DI." The Core DI designer did significant testing to determine which Stock and Bond ETFs to place in the DEP to produce optimal returns. For the Core DI our designers determined that a Small Cap Growth Stock ETF and a Long Term Treasury ETF combined in the DEP gave the best results. At any one time the Core DI holds one of these ETFs. The market, not people, decide when to switch from Stocks to Bonds based on empirical market observations.
In this new world of DI investing does the buyer of the Core DI have to guess at optimal money allocations to Bonds and Stocks? No. Does the buyer have to guess at which types of bonds (or stocks) to include in the portfolio and the percentages assigned to each? No. Does the DI buyer have to continuously worry about adjusting allocation percentages as markets change? No. The Core DI buyer simply buys and holds it while the market determines when changes are needed to optimize performance.
What a difference. Today we use asset allocation to build portfolios and decisions are reduced to "guessing." In the Dynamic Investment world of investing there are no asset allocation decisions to be made, no attempt to try to analyze the market to predict future movements and no room for bad or sales-biased recommendations.
In other words in the DI future of investing I can just throw away the email I got today entitled “How to Navigate an Uncertain Bond Market.” I simply don’t care about all of these focused bond ETFs which are impossible to choose from with any confidence.
What about performance?
In an asset allocation portfolio virtually any mix of Bond ETFs would have earned an average annual return of about 6% during the period from 2007 to mid-2016 with a Sharpe Ratio of about 0.70.
During the same period the time diversified NAOI Core Dynamic Investment earned an average annual return of +27.5% with a Sharpe Ratio of 1.08.
This, in a nutshell, is the difference between how we invest today using MPT, asset-allocation portfolios and how we will invest in the future using NAOI Dynamic Investments. Today’s investing world is filled with guesses, unneeded product choices and a reliance by the public on expensive advisors to sort it all out. The future of investing will consist of the public buying Dynamic Investment off-the-shelf “products” and simply holding them while they automatically adjust the ETF they hold based on objective market movements to both maximize returns and minimize risk And the DI holders will earn far higher returns with far less risk and lower expenses than if they held a traditional MPT portfolio.
See the difference?