Time-Diversification: The Key to Successful Investing


As investors we must be aware of the benefits of diversification in our portfolios. The most commonly used types are Company Diversification and Asset Diversification. Both reduce the risk of our holdings. But the NAOI has identified and introduced into the portfolio design process a third type that we call Time-Diversification and it is the key to successful investing. This Blog Post explains how.

Common Diversification Elements

Standard diversification elements used in virtually every investment portfolio today are as follows:

  • Company Diversification – This type of diversification protects us from the risk of owning single company stocks. We reduce this risk by purchasing mutual funds or Exchange Traded Funds (ETFs) that enable us to place groups of stocks in our portfolios with a single purchase.
  • Asset Diversification – Asset types such as stocks and bonds are cyclical in price and move up and down at different times. Asset diversification protects us from the downside risk of owning only one asset type. We protect our portfolios by including in them mutual funds or ETFs that track different asset types. Modern Portfolio Theory (MPT) then guides our decisions related to how much money to allocate to each asset type in order to match a specific risk tolerance level. MPT also embraces a buy and hold management strategy making them “static” investments and insensitive to market changes.

These two diversification elements are used to reduce risk in virtually all portfolios designed by financial advisors today. It must be noted, however, that diversification means that at all times we are required to hold both winning and losing investments. Thus, these two diversification elements not only reduce risk but also reduce returns. As a result our portfolios are not capable of taking full advantage of the positive returns that the market makes available in virtually all economic conditions. And this is a problem.

The NAOI has identified and developed a third diversification element that solves this problem. We call it “Time-Diversification” and it changes everything.

The Power of Time Diversification

After the melt-down of MPT-based portfolios during the 2008 stock market crash, NAOI researchers began looking for another type of diversification that could have prevented this carnage and that could also improve the performance of portfolios in general. After extensive research we found it in the form of time-diversification. Here’s how it works:

We first defined time-diversification as a portfolio design element that would enable it to automatically change the equities it holds over time in order to take advantage of market movements by purchasing only ETFs trending up in price and avoiding or selling those that are trending down. The NAOI set out to create a new investment type that could do just that.

The NAOI Dynamic Investment

As we started our development effort we immediately saw that we could not use MPT methods to create our target investment type. MPT dictates the use of a long-term, buy-and-hold portfolio management strategy and thus was of no use to us. So we kicked MPT to the curb and started from scratch to define a better portfolio/investment design and management methodology.

After another period of extensive research and testing we found the methodology we needed to take advantage of a time-diversity. We call it Dynamic Investment Theory (DIT). DIT defines the rules for creating a new investment type called Dynamic Investments (DIs) that take full advantage of three diversity elements – Company, Asset and Time.

Central to how the DI investment type does this is that each includes what we call a Dynamic ETF Pool or DEP. The DEP holds a group of ETFs specified by the DI designer that are purchase candidates for the DI. We gave DIs the built-in intelligence to periodically (e.g. quarterly) rank the ETFs in the DEP to identify the one that is trending up most strongly. This is the only ETF that the DI purchases and holds until the next review when the DEP is ranked again and the ETF changed if necessary. By periodically and automatically changing the ETF held based on market observations, not on human judgments, DIs are the market’s first investment type that can be said to be time-diversified.

The Amazing Effects of Time-Diversity

What effect does time-diversification have on investment performance? This question is answered in the chart provided below. It compares the performance of an MPT portfolio and an NAOI Dynamic Investment, both using the same ETFs – one that tracks a Stock Index and one that tracks a Bond Index – but in different structures. The MPT portfolio simply buys and holds both ETFs for the period with the allocations shown while the DI rotates between them, with 100% allocation, based on market trends.

The superior performance of the DI is obvious and it was produced with less risk than the much lower returns of the MPT portfolio. What is the major difference between these two investment structures? The MPT portfolio used two diversification factors – Company and Asset. The Dynamic Investment used three – Company, Asset and Time.

And yes, we met our original of creating an investment type that would not have melted down during the stock market crash of 2008. In fact, the Basic Dynamic Investment used in the chart just above earned +33% during the stock crash year of 2008 by quickly and automatically switching to 100% bonds when stocks started to trend down. It then automatically switched back to 100% stocks when the market started to recover in 2009 and has owned stock ETFs most of the time since then; allowing it to fully participate in the unprecedented bull-market from 2009 well into 2017..

A New Era of "Dynamic"  Investing

The introduction to the market of time-diversified, NAOI Dynamic Investments changes virtually every aspect of how we invest today. It ushers in a new era of simpler, more profitable and less risky investing. More information is found at www.DITheory.com.

You can learn how to use Dynamic Investments to significantly improve the performance of your portfolio today by reading The Dynamic Investment Bible that is discussed and can be purchased at this link: www.naoi.com/store .