Investing Today Does Not Work!
On this page I discuss the dangerous and unacceptable world of investing that individuals are forced to accept today. Here I discuss the much improved way that investing will work in the future with the use of NAOI Dynamic Investments.
An Unfriendly World for Individual Investors
The world of investing today is so complex, overrun with information and devoid of logic that people are forced to seek the help of financial advisors to navigate it. Then, because nowhere have they been taught in academia how to invest, they passively accept whatever investments are recommended to them without question.
Simply entrusting your portfolio to an advisor puts your financial future in danger for two reasons. First, financial advisors are also salespeople who have quotas to meet. Their motivations may not be the same as yours. Second, the entire financial services industry today uses a portfolio design methodology based on Modern Portfolio Theory (MPT), an approach that was introduced to the markets in 1952. 65+ years ago markets were a far different place than they are today. While markets have evolved significantly since then, MPT methods have barely changed at all, and they simply don't work in modern markets. You probably hold an MPT-based portfolio today and, by doing so, your money is at risk.
Following are just a few problems with an investing world that revolves around MPT portfolios:
Using MPT Portfolios in Today's Markets
Virtually all portfolios held by individuals today are designed based on an approach set forth by Modern Portfolio Theory (MPT). This theory says that a portfolio should be designed to meet an investor's risk profile. This is done by determining the portfolio allocation of money between various asset classes; mainly between stocks and bonds. Then the portfolio is to simply be bought and held for the long term. This theory is a disaster in today's markets. Below I show just a few problems of holding an MPT portfolio today.
Using a 65+ Year-Old Methodology!
First it is important to understand just how outdated MPT methods are. You can see in the chart at right that Modern Portfolio Theory was introduced in 1952 when markets where a far different place.
Back then markets were relatively "quiet" with minimal volatility and a long-term buy-and-hold strategy made sense. But look at markets today. The are exponentially more volatile making a buy-and-hold strategy a disaster.
Modern markets are no place for an MPT portfolio design strategy. MPT needs to be replaced and it is with Dynamic Investment Theory that you will learn about on this site and in The Dynamic Investment Bible.
Problems with MPT Portfolios
Here are a few problems that individuals face today because their portfolios are designed using MPT methods:
- Static Investments. MPT portfolios use a long-term, buy-and-hold management strategy. As a result, these are "static" investments in a "dynamic" market. When markets change, MPT portfolios have no capacity to capture the positive returns potential of uptrends or to protect investors from downtrends. This market insensitivity can result in massive losses such as those many people experienced in the market crash of 2008.
- The Wrong Goal. MPT portfolios are designed to match the risk profile of the holder. This is bad at many levels. First, determining the risk tolerance of any individual is a very inexact process with no scientific basis. Typically risk tolerance is determined by what is little better than a bunch of "guesses" related to how a person "feels" about losing money. Yet a person's expected returns and thus the financial goals they can expect to reach in life are determined by this guessing game. A better goal for portfolio design would be to maximize returns and minimize risk in all economic and market conditions. This is the goal of all Dynamic Investments (DIs). DIs don't care about risk profiles and do not need to be customized for each individual investor. By eliminating the error-prone and totally unnecessary portfolio customization process Dynamic Investments greatly simplify the world of investing and make it much more profitable of the investing public.
- Owning Losing Investments at All Times. MPT portfolios reduce risk by at all times owning both winning AND losing investments to reduce risk. But doing so reduces returns as well. This results in MPT portfolios producing returns that are mediocre at best. Dynamic Investments strive to only hold equities that are moving up in current market conditions while selling or avoiding those that are moving down. This superior management strategy enables returns to soar without excessive risk.
- Bad Assumptions. MPT does not work unless the risk of owning Bonds is low. When attempting to lower the risk of a portfolio, an MPT portfolio designer increases the percent allocation to Bonds. Yet in modern markets Bonds can be just as risky as Stocks if not more so. In mid-2016 interest rates on Government Bonds were near zero. When these rates go up, as they eventually must, the price of Bond ETFs and Mutual Funds will plummet. And so will the value of portfolios that have them as a major component. Bonds are not the ultra-conservative and low-risk investment that they were in 1952 when MPT was introduced. This is one of many MPT assumptions that were true in the 1950's but are dangerously false today.
- Not a Total Investing Solution. MPT portfolios are not comprehensive investments. They tell you what investments to buy and how much money to allocate to each, but they are mute on how to manage them - taking the easy road of just telling investors to buy-and-hold their portfolio for the long-term. Perhaps an advisor will get around to reviewing an MPT portfolio periodically and perhaps they won't. There are no rules. In stark contrast, Dynamic Investments ARE comprehensive investments. They not only tell holders which equities to work with, but also define a set of logical steps for managing them on an ongoing basis.
These are just a few of the flaws of MPT, a portfolio design theory that is seen today as "settled science." But its use needs to be questioned and fast. If you hold an MPT portfolio today, and odds are good that you do, your wealth is in danger. We saw in 2008 how an MPT's value can be destroyed virtually overnight. It can, and will, happen again unless changes are made.
Change Is Not Optional
The way we invest today (i.e. using MPT methods and portfolios) must be changed for individuals to take full advantage of the positive returns potential that the market offers in any and all economic conditions and to protect them from inevitable market downturns and crashes. But to change there must exist a better theory and portfolio design approach to take its place.
Such a replacement did not exist until the introduction of Dynamic Investment Theory. When you finish The Dynamic Investment Bible you will have a very simple and superior alternative to MPT in the form of DIT and the next-generation investment type that it creates - Dynamic Investments. And you will be able to use what you learn immediately upon finishing the last chapter - whether your advisor is on-board or not!
I provide an overview of the Dynamic Investment Solution on the next page in this section of the site.