Stand Out In A Crowded Field
On this page I list just a few of the competitive advantages that will be gained by your organization when using NAOI Dynamic Investment Theory methods and offering NAOI Dynamic Investment products. There are others but these will illustrate the power of incorporating into your product line a fundamentally different approach to investing - one that is far more effective than the decades-old MPT portfolio design approach used today.
Advantage 1: Offering Superior Investments and Investing Methods
The first and most obvious competitive advantage of using Dynamic Investments is that you will offering to the public superior investments. DIs produce higher returns with less risk than virtually any MPT-based portfolio in the market today. And unlike complex, asset-allocation MPT portfolios that people need advisors to construct, DIs are so simple that all individuals will be able to easily understand how and why they work and have the confidence to invest in them. They will see that even the most basic NAOI "Core" DI earned average annual returns of 24%+ during the decade from 2007 through 2016 with minimal risk and absolute protection from market crashes. They will be able to compare the performance of DIs with their current MPT portfolios that most likely struggle to earn even 6% and wonder why they have not been offered Dynamic Investments by the work with whom they work.
Advantage 2: Attracting a Huge, New Client Base
A major asset owned by the NAOI is our access to hundreds of average people with money to invest who were, or are, NAOI members and students. We constantly interact with this group to gain their feedback on any topic related to the world of investing, how they view it and how it can be improved. Public feedback related to financial advisors tells us that people with money to invest can be roughly divided into these groups:
1. Those who are happy with their financial advisors or at least ambivalent
2. Those who are decidedly unhappy with their advisors
3. Those who are not participating in the the market for fear of losing money
Individuals in the last two groups who have learned about Dynamic Investments have told us that they would actively seek to work with a firm that offers this new investment type. The NAOI also has indications that a large number of people in group 1 would do the same. Thus by offering Dynamic Investments and related products - a financial organization has an opportunity to significantly expand its prospect and client base.
Advantage 3: Unleashing the Full Potential of ETFs
Exchange Traded Funds (ETFs) are an extremely powerful investment type. They combine the diversity elements of mutual funds with the trading ease of stocks. And an ETF can be found that tracks virtually any asset type, market or market segment. ETFs should be in far greater use than they are today. But the full potential of ETFs is not being realized because they are typically purchased as one component of a traditional MPT, buy-and-hold portfolio meaning that their trading flexibility is not utilized. A second reason why ETFs are not widely used today is that they have low commission and management fees and financial advisors are not likely to recommend them to clients when selling mutual funds is much more lucrative. As a result, many average people with money to invest have never even heard of ETFs! And many of those that have, view ETFs today as little more than "quirky" mutual funds and not mainstream investments. This misconception ends with the introduction of Dynamic Investments.
In the future world of NAOI Dynamic Investments, ETFs will be free to live up to their potential. They are the investment type of choice for use in building DIs. Each is designed to include a Dynamic ETF Pool component that contains ETF candidates for purchase by the DI. At review time only the strongest uptrending ETF in this pool is bought and held until the next review. Because of their ease of trading and low costs, ETFs enable a DI to adjust its holding(s) quickly, efficiently and inexpensively in response to market changes. The use of Dynamic Investments unleashes the true power of ETFs and elevates them to the mainstream investment status where they deserve to be. As a result ETF sales will soar.
Advantage 4: Boosting the Returns of MPT Portfolios
The NAOI realizes that the transformation of the investing world from static MPT portfolios to NAOI Dynamic Investments will take time. To effect a smooth transition, Dynamic Investments can be included as one element of a traditional MPT portfolio and treated like just another asset class. For example a traditional MPT portfolio may be constructed as follows:
- 50% Total Stock Market
- 40% Total Bond Market
- 10% Total Emerging Markets
Average Annual Returns for this portfolio for the period from 2007 to mid-2016 were: 6.1% with a Sharpe Ratio of 0.34 - (a measure of risk, the higher the better.)
An asset allocation portfolio that includes a Dynamic Investment may be constructed like this:
- 30% Total Stock Market
- 30% Total Bond Market
- 40% NAOI Designed "Primary" Dynamic Investment
Average Annual Returns for this portfolio for the period from 2007 to mid-2016 were: 18.4% with a Sharpe Ratio of 1.17
The addition of an NAOI Dynamic Investment to any standard MPT portfolio will improve its performance significantly. Your clients will love this type of "hybrid" portfolio as it delivers higher returns with lower risk and still uses an asset-allocation format with which they are familiar. The allocation to the DI can then be gradually increased as clients become more comfortable with the performance of this new investment type. Note that the NAOI Primary DI as a standalone investment earned an annual average return of +32% during this period.
Advantage 5. Making Asset Classes "Dynamic"
Designing asset allocation portfolios today presents many challenges. First, MPT requires that the portfolio designer accurately measure the risk tolerance of the investor. There is no science in this process so a "guess" is usually made. Unfortunately this guess will determine the investor's financial future. So the MPT process starts off bad and gets worse.
MPT computer programs then calculate an appropriate asset allocation (mainly between stocks and bonds) for the investor's risk tolerance level but then an advisor must find appropriate investments to populate each asset class. This is an almost impossible task to perform effectively. For example, MPT may recommend a 50% allocation to the stock asset class but there are numerous stock "type" ETFs to choose from such as the following:
- Total Stock Market
- Large Cap Value Stocks
- Small Cap Growth Stocks
- Dividend Stocks
- .... etc.
Each area of the stock market can provide exceptional returns in different economic conditions. There is no way to predict which will provide the best performance in a traditional MPT, buy-and-hold portfolio. So advisors typically just select a total stock market investment which historically produces very mediocre returns within the stock asset category.
Dynamic Investments solve this problem. A DI designer can simply place an ETF for each stock-type choice in the DI's Dynamic ETF Pool. The Dynamic Investment will then buy and hold for one review period ONLY the stock-based ETF that is moving up fastest in current market conditions. In other words, the market decides which types of stock to own at any one time, not advisors. And the market is far smarter than any market analyst can hope to be. Let's compare two scenarios involving the selection of a stock component for an MPT portfolio with a 50% stock allocation and a 50% bond allocation:
1. Just place SPY (an ETF that tracks the S&P 500 Index) in the portfolio for the stock allocation:
- Average Annual Returns for 2007 to mid-2016: +6.3% per year, Sharpe Ratio: 0.29
2. Use an NAOI "Stock Dynamic Investment" for the stock allocation that includes in its DEP ETFs for Small Cap Growth, Small Cap Value and a Bond ETF "escape valve" - that will be automatically bought when stocks are moving down. The DI owns only the ETF moving up most strongly at review time - e.g. quarterly.
- Average Annual Returns for 2007 to mid-2016: +32% per year, Sharpe Ratio: 1.19
The superior choice for the stock component of an MPT portfolio is an NAOI Stock Dynamic Investment. The same design methods can be used to create a Dynamic Investment for any asset type including Bonds, Emerging Markets, Commodities, Real Estate, etc. With the introduction of Dynamic Investments, "guessing" which area of an asset category to invest in goes away. The market will automatically select the that holds the potential for the greatest returns.
Advantage 6. Capturing the High Returns Potential of Volatile ETFs
Portfolio Managers who read The Dynamic Investment Bible, or take advantage of NAOI support resources discussed below on this page, will learn how to take full advantage of volatile ETFs that are not appropriate for traditional MPT, buy-and-hold portfolios. ETFs that track areas of the market such as commodities, emerging markets, single country stocks and even the energy and healthcare sectors all have significant upside potential but also major downside risk. Most portfolio managers would think long and hard before putting these investments in a buy-and-hold, MPT portfolio. But when placed in the Dynamic ETF Pool (DEP) of a Dynamic Investment this concern goes away. Let's look at an example of how Dynamic Investments "tame" volatility.
Profiting from China. PEK is an ETF that holds China stocks. It is a very volatile investment producing both extreme positive and extreme negative returns. Because of its high risk profile, PEK is not found in many MPT portfolios recommended to the public. Therefore, PEK's trading volume is low. But putting PEK in a Dynamic Investment’s DEP can produce significant returns without excessive risk. Below is an example. Shown is PEK's price chart for 2014-2015. (source: finance.yahoo.com)
The chart shows that that PEK was very volatile during this period. You can see the returns potential that PEK offered during this time. But if owned in a buy-and-hold portfolio the investor would have watched PEK's price soar and then give back most of its gains.
Returns for a "Dynamic" PEK. What if, instead of just buying and holding PEK, we placed this ETF in the DEP of the NAOI Core Dynamic Investment along with RZG (a small cap stock ETF) and TLT (a long term bond ETF) and a quarterly review cycle? This makes PEK “dynamic.” Below is a Table that shows what "Dynamic PEK" would have owned for each quarter during 2014 and 2015 along with the associated returns. (Note that this is chart is taken from The Dynamic Investment Bible, thus the "Table 11-B" reference in the title.)
The backtest period started with the Dynamic Investment owning RZG, followed by two quarters owning TLT. Then China stocks started roaring upward and PEK was owned by the DI for four consecutive quarters – a full year. During that year its price increased about 65% and then ended its upward trend with a loss of close to 30% in Quarter 3 of 2015 at which time the DI switched back to TLT in Q4. So, a net gain of 35% in the year of holding only PEK is not bad, right?
But wait, each time PEK was bought at a quarterly Review, Dynamic Investment Theory methods call for a Trailing Stop Loss Order of 10% to be put in place. Thus, instead of losing 30% in the Quarter 3 of 2015 it lost only a maximum of 10% as the Trailing Stop Loss sell order was triggered. So for the year of holding PEK the DI's net gain was 55%! Then PEK again went dormant in the DEP as TLT moved to the top of the DEP and was purchased. But PEK was still lurking in the DEP as the Dynamic Investment waited and watched for the next China stock boom to emerge. Only by using PEK in a Dynamic Investment structure such as this can the returns potential of a volatile ETF like PEK be captured without the accompanying risk!
There are many ETFs in the market today that have low trading volume because of volatility issues and on the verge of dying. These ETFs can be revived by placing them into the DEPs of Dynamic Investments!
Advantage 7. Uncovering Hidden Value in an Existing ETF Product Line
Many financial organizations offer an extensive ETF product line. Using traditional MPT investing methods, these ETFs are sold much like mutual funds as one component of a buy-and-hold, asset allocation portfolio. This methodology hides the full value of an ETF product line. This is value that is only uncovered by combining individual ETFs in the Dynamic ETF Pool (DEP) of an NAOI Dynamic Investment.
Let's look at an example of how hidden value can be uncovered through the use of Dynamic Investments. The Blackrock organization, via their iShares product line, offers scores of ETFs that enable the public to invest in virtually any area of the market. Below are three ETFs in the iShare product line that I will use in this example. Each tracks the index or asset type shown.
- IVV - S&P Small Cap 600 Index ETF
- IJR - S&P 500 Index ETF
- TLT - Barclay's Long Term Treasury Bond ETF
Typically such ETFs are sold to be included in an MPT portfolio. But they hold far greater value than that. To truly unlock the value of these three ETFs they can be combined in the DEP of a Dynamic Investment. Let's see how.
Value Creation Example. First let's create an MPT, asset-allocation portfolio and give a 33.3% allocation to each of the the above listed ETFs which are then just bought and held for the long term. The returns and Sharpe Ratio (a measure of Risk) for this portfolio for the period from 2007 to 2015 are shown in the second row of the table below at right called "MPT iShare. This is how ETFs are used today; as part of an asset-allocation, buy-and-hold portfolio. You can see that its performance is mediocre at best.
Next let's create a Dynamic investment that I will call "Dynamic iShare" that holds all three ETFs in its DEP. Remember, in a DEP these ETFs are simply purchase candidates. Only the one that is moving up most strongly at Review time is purchased and held until the next Review (a three month holding period in this example.) The performance of this simple Dynamic iShare is shown in the bottom row of the table.
The "Dynamic iShare" simply rotates its holding among the three iShare ETFs in its DEP based on objective market observations. You can see that its returns, using the same three ETFs as in the MPT portfolio, are astounding.
This quick example shows the power of Dynamic Investments to create value in an ETF product line that is currently lying dormant. With the help NAOI education and consulting (discussed below), ETF creators and vendors can exponentially increase the value of their existing ETF product line with little time, expense or effort. All that's needed is the the use of the DIT structure and methodology that the NAOI can teach.
Advantage 8. Derivative Dynamic Investment Products: The NAOI Market Biased Dynamic Portfolio
Dynamic Investment Theory is more than simply creating standalone Dynamic Investments. Above I discussed creating a DI / MPT hybrid portfolio template that used a DI as one component of a traditional MPT portfolio and the benefits of doing so. Another "derivative" DIT product is one that the NAOI calls a "Market Biased Dynamic Portfolio" that works as explained below.
A basic Market Biased Portfolio has at least three components as in the following example with allocations shown:
- 25% - static, buy-and-hold, stock ETF holding
- 25% - static, buy-and-hold bond ETF holding
- 25% - NAOI Core Dynamic Investment Holding with a stock ETF and a bond ETF in its DEP
This portfolio will always have a minimum allocation to stocks AND to bonds of 25%. The total allocation to each asset class, however, will depend on market conditions as detected by the NAOI Dynamic Investment which will hold either a stock ETF or a bond ETF at any one time.
Thus, when the stock market is moving up the total portfolio allocation will be 75% stocks and 25% bonds. When the bond market is moving up the total allocation will be 75% bonds and 25% stocks. You can see, then, how this special type of hybrid portfolios is "biased" toward the area of the market trending up at all times.
The annual average returns for the above described Market Biased Portfolio for the period from 2007 to mid 2016 was +16.4%.
Advantage 9. Dominating the 401(k) and Retirement Plan Market with Dynamic Investments
The future of 401(k) Plans is bright due to the introduction of Dynamic Investments. Following are just a few of the ways that that these will benefit from the use of DIs. Each is discussed in detail in Chapter 9 of The Dynamic Investment Bible.
Higher Return, Lower Risk Investment Choices. Empirical observations show that Dynamic Investments are capable of producing returns that can more than double those of traditional MPT portfolios on a consistent basis and with half the risk. This is the first and most obvious benefit of using DIs in a 401(k) Plan as opposed to ancient MPT portfolios. There are others.
Less Education Needed. DIs are very simple portfolio “products” that can held for the long term without customization for each investor. Because DIs change the ETF they hold automatically based on market observations investors need not concern themselves with making trade decisions based on economic conditions, world events or even changes in their risk profile such as aging. The market is doing all of the analysis needed to make optimal trade decisions. Thus, minimal investor education, and NO human decision making, is needed to manage DIs in a 401(k) Plan effectively. This solves the massive problem of no, or inferior, investor education that exists in the 401(k) world today.
A Superior Default Investment. Target-date funds and similar investments that simply, and blindly, increase portfolio allocation to bonds as an investor ages are not appropriate as default investments for 401(k) Plan participants today. In modern markets, with interest rates near zero, Bonds can be a more risky investment than Stocks and automatically increasing allocation to them as the investor ages can result in disaster. The simple NAOI Basic Market-Biased Portfolio, described above, is a far superior choice as a 401(k) default investment, providing significantly higher than market average returns with lower than average risk.
Higher Employee Participation Rates. Simplicity, higher returns, less risk and absolute protection from market crashes; all of these are benefits of using Dynamic Investments or Dynamic Hybrid Portfolios in a 401(k) Plan. Companies that do so can expect close to 100% employee participation rates as a result. And Plan Providers that offer DIs will have the competitive advantage needed to capture a significant share of this multi-billion dollar market.
Advantage 10. Developing Proprietary Dynamic Investment Assets
Today the ETF world is getting crowded. There currently exists an ETF that tracks just about every index in the market. New ETFs are being consigned to increasingly narrow areas of the market and, as such, can be very volatile. With the opportunities for new, unique ETF development dwindling, the market becomes dominated by organizations with the largest marketing budgets. Dynamic Investments solve this problem by enabling the creation of an unlimited number of new, unique Dynamic ETF products.
Dynamic Investing Theory (DIT) opens a vast new world of opportunity for investment product developers. Since DIT is a new and radically different approach to investing, the opportunities for original research and the development of unique, proprietary products are huge. 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 Investment and Dynamic Investment derivative products the likes of which have never before been seen.
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 investment product format that manages itself without the interference of human judgments. Rarely does such a lucrative opportunity present itself in the rather staid field of investing. 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. The key is being the first to take advantage of these new opportunities.
Summary of Competitive Advantages
These are just a few of the areas where YOUR organization can gain a massive competitive advantage by using NAOI Dynamic Investments and NAOI Dynamic Investment Theory. The revolutionary DIT approach to investing opens a new world of opportunities and competitive advantages. Organizations that embrace them first will define the future of investing.
NAOI Dynamic Investment Theory Support Resources
Dynamic Investing is a fundamentally new approach to investing. It does not "tweak" Modern Portfolio Theory (MPT) methods, it replaces them. As such, there will be a transition period between the old methods and the new methods and this needs to be planned for. The NAOI is ready, willing and able to support any organization in this effort via the following resources:
1. Customized Consulting
All financial organizations have a strategic plan for "winning" in what promises to be an increasingly competitive future of investing. The use of Dynamic Investments gives YOUR organization a once in a lifetime opportunity to stand apart from a crowded field. But to do so an in-depth understanding of how Dynamic Investment Theory (DIT) works and how Dynamic Investments can be integrated into your unique operations and products is needed.
To take maximum advantage of the approaching revolutionary change, the NAOI offers to financial organizations customized consulting services. Conducted exclusively by Leland Hevner, the developer of DIT, organizations that take advantage of a consulting agreement will be able to leverage each Dynamic Investment capability discussed above, and others, into major competitive advantages. Go to the Consulting area of this site for more information.
The NAOI offers Seminars to financial organizations who want to obtain a more in-depth, general understanding of NAOI Dynamic Investments and methods. Such Seminars will enable organizations to plan NOW for the central role these investments will play in the future of investing. Typically these Seminars are held at the offices of a financial organization for groups of people. The format will include a comprehensive presentation by Leland Hevner along with the opportunity for questions. The various Seminars offered by the NAOI are found by clicking this link.
The NAOI offers a series of DIT Training Classes that teach financial professionals how to create and work with Dynamic Investments. The difference between NAOI Classes and NAOI Seminars is that in Classes each attendee participates in the learning process much like a student in a college classroom setting. Class participants will be able to interact directly with the instructor for specific questions and issues. The Classes currently offered are found by clicking this link.
4. Quantity Discounts for "The Dynamic Investment Bible"
The NAOI offers significant discounts for quantity purchases of The Dynamic Investment Bible book. Contact us for more details.
Contact the NAOI or Leland Hevner Personally
Contact the NAOI using the information on the Contact Page of this site or contact me directly at LHevner@naoi.org. Also sign up for the DIT Update Alerts Email List at the bottom of this page to immediately receive notice of new DIT developments as they occur.