A Simple, Better Way to Invest
This Web Page provides a quick synopsis "cheat sheet" for how Dynamic Investments work. It enables you to skim major topics related to NAOI Dynamic Investments, presented below, and then find more detail for each by clicking links to get more detailed information on each.
Dynamic Investment Theory and Dynamic Investments are discussed in detail in The Dynamic Investment Bible shown at right that is available for purchase in the NAOI Store. Readers of this book will be able to implement and manage simple but powerful Dynamic Investments that have the potential of earning 20%+ per year on a consistent basis without excessive risk and without depending on the advice of "experts."
This book ushers in a fundamentally better future of investing;one that is simpler, more user friendly, less risky and more profitable for the investing public than the one they are forced to deal with today. Learning why and how is a topic that the audience of any media reporter will find fascinating.
Contact Information: NAOI President Leland Hevner. LHevner@naoi.org.
A "Cheat Sheet" for Understanding Dynamic Investments
1. The World of Investing Today is "Stuck" in the Past
Author Leland Hevner founded the National Association of Online Investors in 1997 to empower individual to invest with confidence via objective and comprehensive investing education. Within a few years, the NAOI became the market's leading investor education resource. Thousands of people have either taken NAOI college classes or read its books.
In 2008 Hevner was showing a college class how to build portfolios to match their risk profiles using asset allocation methods as defined by Modern Portfolio Theory (MPT) - the industry standard approach for portfolio design today. During this class the market started to crash and Hevner watched with dismay as the portfolios he was teaching his students to create crashed along with it.
At that point Hevner had to admit that after a decade of teaching MPT methods, they no longer worked in modern markets. He saw that he was teaching portfolio design methods that were introduced in 1952 when markets were a far different place than they are today (see chart.) While markets had evolved significantly since MPT was first used, portfolio design methods have barely changed at all and they no longer work as we saw clearly during the crash of 2008. With this realization, Hevner began a research effort to find and develop a better, updated approach to investing that does work in today's markets. He was successful.
2. A New Investing Approach - Starting with a Clean Slate
Hevner started his research by studying Modern Portfolio Theory in-depth. He tried to use it to design portfolios with higher returns, lower risk and less dependence on the advice of "experts." He couldn't do it. A major problem was that MPT portfolios are static, buy-and-hold investments trying to cope with an increasingly dynamic equities market. As a result, he realized that this flawed approach could not be saved. So, he kicked MPT to the curb and started with a clean slate. He vowed to find a better approach to investing unconstrained by the out-dated methods and concepts used by financial advisors almost universally today. He wanted to develop an approach that was based on scientific method and empirical observations - not the subjective judgments and "guesses" used to predict market movements and to design portfolios today.
3. The Change Needed: NAOI Dynamic Investments
After 5+ years of intense research, Hevner found the better approach to investing that he was seeking in the form of Dynamic Investment Theory (DIT) and the use of Dynamic Investments (DIs) that the theory creates. Using logical and scientifically sound methods, DIs are designed to periodically review the market and buy only ETFs that are moving up in price while selling or avoiding those that are trending down. And DIs automatically generate trade signals to meet this goal based on objective observations of market movements, not on subjective human judgments that are the source of much that is wrong with investing today.
DIT defines how Dynamic Investments are built. Each has the following components that are illustrated in the diagram at right. These are the components that a designer defines to create unique Dynamic Investments for a variety of goals. None of these goals include meeting the risk tolerance level of each of millions of individual investors. In the world of Dynamic Investments that guessing game goes away!
- Dynamic ETF Pool (DEP) - All DIs use Exchange Traded Funds (ETFs) as their primary investment vehicle. The ETFs that a specific DI works with are placed in its DEP. These are "candidates" for purchase that define the areas of the market where the DI will search for positive returns. Only the ETF that is trending up most strongly at the time of market Review is purchased and held until the next Review.
- Review Period - The market Review Period is set by the DI designer. A typical Review is conducted Quarterly or every 3-months, however it could be monthly at the designer's discretion. The ETF in the DEP that is trending up most strongly at time of Review is bought and held until the next Review event when the DEP is ranked again. If the currently held ETF "wins" again, it is held for another period and no trade is needed. If another ETF in the DEP is ranked higher, the existing ETF is sold and the new top-ranked ETF is purchased.
- Trade Signal - This is the Price Trend Indicator or Indicators used to rank the ETFs in the DEP at Review time. DI designers can use any indicator or combination of indicators that they want. But the NAOI strongly recommends a Trade Signal Indicator that is disclosed in The Dynamic Investment Bible.
- A Fourth Component - There is one more very simple performance enhancing component in an NAOI Dynamic Investment. It is also revealed in The Dynamic Investment Bible and to clients with whom we work.
By changing these DI components a virtually unlimited number of DIs can be created and for a variety of goals. Graduates of The Dynamic Investment Bible will be able to design DIs on their own if they wish and implement them using an online broker. However, the NAOI suggests that most retail investors use the very powerful DIs defined in the book.
4. Proof of Concept - 20%+ Average Annual Returns
Of course all of this is irrelevant if DIs don't produce superior performance. Extensive back-testing of multiple DIs created by the NAOI show that they do. The Table below displays the performance of two such DIs, the NAOI Core DI that has only two ETFs in its DEP, a stock and a bond ETF, and the NAOI Primary DI that has four ETFs in its DEP. Each is reviewed quarterly. The Table shows the Average Annual Returns of each DI for the period from the start 2007 to end of 2016 along with a Sharpe Ratio which is a measure of how much return is achieved for each unit of risk taken - the higher the better. For comparison purposes the bottom row shows the performance of the S&P 500 for the period.
These returns are astounding - far above what today's financial "experts" will say are possible. And they are impossible when constrained by MPT's static investing methods. Returns are allowed to soar without exceptional risk only by using NAOI Dynamic Investments - a dynamic "next-generation" investment type that automatically detects and reacts to significant market movements.
5. The Difference - "Time-Diversification"
These returns are amazingly high for two main reasons. First, a DI only buys ETFs that are trending up in price and sells them when they start to trend down OR when another ETF in the DI's DEP is moving up more strongly. In contrast, MPT portfolios simply buy and hold equities regardless of their price movements. Second, DIs use a form of diversification that MPT portfolios do not - "Time Diversification." The ETF(s) that a DI holds change over time to take advantage of market movements, enabling them to provide significantly higher returns with far less risk than static, MPT portfolios that completely ignore market movements.
6. Higher Returns without Higher Risk - The Death Knell for Modern Portfolio Theory
A core principle of Modern Portfolio Theory is that higher returns only come with higher risk. Dynamic Investment Theory says that this is not necessarily true. It IS true using MPT methods but not for DI methods. DIs can increase returns by adding more ETFs to the DEP and thus increasing the area of the market where they search for positive returns at Review time. Note in the above Table that the higher returns of the Primary DI over the Core DI do not come with more risk as evidenced by the fact that the Sharpe Ratio of the Primary DI is higher than that of the Core DI. The Primary DI's higher returns come from it having 4 ETFs in its DEP while the Core DI has only 2. The fact that DIs can produce higher returns without higher risk blows Modern Portfolio Theory out of the water!
7. Dynamic Investments are "Portfolio Products"
NAOI Dynamic Investments are the first "portfolio products" in stock market history. They can be called "products" for multiple reasons. First they are comprehensive investments. Each DI defines the ETFs it will work AND how trades are to be made on an ongoing basis - MPT portfolios don't bother with this detail. And once designed, a Dynamic Investment does not change - only the ETF being held does. Thus, a DI is a product that can be bought "off-the-shelf", without the need for customization, and held for the long-term. It is, in essence, a buy-and-hold investment that buys-and-sells the ETFs in its DEP. Yes, that sounds strange. But when the fundamental way we invest is changed - new terms need to be coined to describe them. In this case, a DI can best be described as a standardized Portfolio Product that any investor can take advantage of regardless of their risk profile. They are, in fact, investing products for the masses, and investing becomes a consumer market.
8. The Holy Grail of Investing - Portfolio Productization
For decades financial thought-leaders have tried to "productize" the world of investing. They have searched for investment products that work for all people without customization. This is seen as the Holy Grail of investing. But this goal will never be reached as long as Modern Portfolio Theory is used and portfolios must be customized for each individual's risk tolerance. With Dynamic Investment Theory this roadblock to productization goes away. DIs have as their goal the capture of positive returns potential that the market offers somewhere in the market in any economic condition. This is a universal goal that all investors want to achieve and thus no individual customization is needed. In DIT Hevner has found the "Holy Grail" of productized investing and so will you by reading The Dynamic Investment Bible.
Productization of portfolios will revolutionize the field of investing. When people have the choice of buying DI Portfolio Products off-the-shelf from multiple vendors or implementing them on their own - power flows from the financial services industry to the investing public. And the cleansing effects of competition enter a market that today is dominated by financial advisors who depend on under-educated, passive clients simply accepting the investments they recommend without question. This power imbalance ends with the introduction of Dynamic Investments.
9. Dynamic Investment Benefits for Individuals AND Financial Organizations
The introduction of Dynamic Investments into the world of investing should not be seen as negative by the financial services industry. The availability of a simple, high-return investment type that protects investors from market crashes will bring millions of individuals into the market that are now on the sidelines in fear. Organizations that embrace and offer DIs will take advantage of a massively expanded prospective client base.
DIs also eliminate the need for the costly, error-prone and time consuming customized portfolio design process that is used today. Because DIs are standardized "products," clients will simply select those that best fit their needs from a menu of DIs offered by a financial firm. Also eliminated in the DI-centric future of investing is the on-going portfolio management process that is so ill-defined and inadequate today. DIs manage themselves automatically - making trades based on observations of market movements not on fallible subjective human judgments.
Freed-up time and expense can be redirected by advisors to more valuable services such as expanded financial planning services which benefit clients far more than advisor fees and fund management expenses which have no positive correlation to portfolio performance. In the future of investing the NAOI sees financial advisors becoming more of a total financial solutions provider and less of a salesperson guided and motivated by sales quotas.
10. A New Era of Investing Development
Hevner's examination of today's investment research and development environment left him unimpressed. He found that virtually no research efforts questioned the supremacy of Modern Portfolio Theory. Even the much touted "robo-advisors" were nothing more a way to automate obsolete portfolio design methods. This is a "sideways" development at best, not an advancement of the art and science of investing.
Dynamic Investing Theory not only questions MPT methods, it replaces them with updated, dynamic methods. As a result, the opportunities for original research and the development of unique, proprietary products that actually advance the world of investing are vast. Instead of devoting time and effort to creating new "me-too" Mutual Funds and ETFs that few people will buy, DIT allows for the creation of superior, Dynamic Investments and Dynamic Portfolio “products” the likes of which have never before been seen. And these new products will attract the interest of millions of investors as each has as its goal high performance and low risk provided in a standardized product package. Rarely does such a lucrative opportunity present itself in the rather staid, slow moving field of investing research. Developers who take advantage of this opportunity first will create a significant competitive advantage in a crowded field and by doing so open massive new revenue streams on their income statements and add valuable assets to their balance sheets.
11. The Evolution of Investing
The world of investing has been stuck in place for decades. It uses portfolio design techniques introduced in 1952 for goodness sake! While markets have changed dramatically since then, investing methods for coping with them have barely changed at all. Dynamic Investments are the fundamental change that the world of investing has been looking for to evolve to the next level of effectiveness and customer satisfaction.
The NAOI recognizes that the use of Dynamic Investments is at odds with much of what people have been taught about investing for decades. As a result, DIs will meet with resistance by financial organizations that are doing quite well with the status quo. But as the market's premier supplier of investor education to the public the NAOI is uniquely equipped to educate the public about the existence of Dynamic Investments and the performance that they can produce. In the face of a rapidly growing public demand for Dynamic Investments, the financial organizations that meet this demand will grow and prosper. Those that don't will die off. This is how evolution works.
12. Explained In One Easy-to-Read Book
The Dynamic Investment Bible explains Dynamic Investment Theory and Dynamic Investments in plain English. It is written for investors of all experience levels and financial professionals of all types. Individual investors will be able to implement and manage Basic DIs immediately upon finishing the book - either in conjunction with an advisor or on their own using an online broker. And financial organization strategists who read this book can begin preparing a transition plan immediately in order to be "first to market" with a next-generation investment type that will dominate the future of investing.
Below is how this information is presented in the 212 page Dynamic Investment Bible:
The Dynamic Investment Bible can be ordered by clicking here.