Another View of Dynamic Investments
There is a lot of new and exciting information on this site. This page pulls together and summarizes in concise points the amazing benefits of using NAOI Dynamic Investments (DIs) and the Dynamic Investment Theory appoach. Many benefits listed below include a link to an area on this site where it is discussed in more detail. A quick scan of these "fun facts" will make you wonder why anyone would want to invest in any other way.
Fun DI Basic Facts
1. The Portfolio You Probably Hold Today Is Dangerous to Your Wealth - This one is not such a "fun" fact. The portfolio design method that is used today by the entire financial services industry is called Modern Portfolio Theory (MPT). It was introduced in the 1950's when markets were a far different place. While markets have evolved significantly since then, portfolio design methods have not. As a result, as investors we are stuck holding "static" portfolios in a "dynamic" marketplace and they no longer work. We witnessed this fact during the market crash of 2008. If you hold an MPT designed portfolio today, your wealth is in danger.
2. Dynamic Investments (DIs) DO Work In Modern Markets - NOW we start with the "fun" facts. The newly introduced NAOI Dynamic Investments are designed to work in today's dynamic markets. They periodically change the equities they hold based on current market trends. And they do so automatically based on objective market observations not the corrosive effects of human judgment. This makes the "dynamic" and capable of thriving in today's more volatile markets.
3. "Time Diversification" Makes All the Difference - Investing risk is reduced by diversification. MPT uses two levels of diversification. Company risk is diversified away by the use of ETFs and/or mutual funds that hold stocks from multiple companies. Market risk is diversified away by placing multiple asset classes in a portfolio. Dynamic Investments use these risk reducers PLUS one other - "Time Diversification" meaning that the ETF they hold changes with time. This factor diversifies away the risk of simply buying and holding equities with no regard to market movements. DIs are sensitive to market movements and automatically adjust their holdings to take advantage of them. Time Diversification reduces risk AND enhances returns for Dynamic Investments and this fact enables their returns to soar beyond what MPT portfolios can produce and what the "experts" will tell you is possible.
5. DIs are "Comprehensive" Investment Products - Traditional MPT portfolio design methods produce portfolios with asset allocations that try to match the risk profile of the holder. That's it. MPT provides no guidance on how to manage portfolios on an ongoing basis other than to just buy-and-hold. In contrast Dynamic Investments not only specify the ETFs it will work with but also how these ETFs are to be managed on an ongoing basis by automatically signaling trades based on market movements. Thus, DIs are the comprehensive investment products that the public wants and needs.
6. Superior, Incredible Performance - None of this matters if DIs cannot provide superior performance. And they do. The simplest possible DI in the form of the NAOI Core DI uses 2 ETFs to look for positive returns in only the stock and bond market. It earned an average annual return rate of +24% during the period from 2007 to mid-2016 and with minimal risk. The NAOI Primary DI that uses 4 ETFs to expand the search area for returns earned an average annual return rate of +32% during the same period. What MPT portfolio or even Hedge Fund even comes close to these returns? - None. Yearly returns for each of these DIs are shown on the home page.
7. Breaking the Risk/Reward Myth - Here's a super fun fact. DIs can earn higher returns without incurring higher risk. MPT says this is not possible. Dynamic Investment Theory (DIT) says that it is. With DIs, higher returns come from placing more ETFs in a DI's Dynamic Investment Pool (DEP) and thus increasing the size of the area where it searches for positive returns. A good example is the increase in returns between the Core DI and the Primary DI discussed in point 6. This increase comes at no additional risk. It results from the Primary DI searching 4 areas of the market for positive returns (i.e. 4 ETFs in its DEP) versus the Core DI with only 2 ETFs in its DEP (one each for stocks and bonds).
8. DIs "Productize" the World of Investing - Traditional MPT portfolios are customized for each individual to match their risk profile. This customization process is filled with subjective human judgments - what I can only call "guesses." And this leaves the investor wide open to bad data, incorrect analysis, sales-biased recommendations and all types of investor abuse. DIs eliminate these problems. They are predefined products that have the universal goal of capturing the positive returns potential that exists in any economic condition with minimal risk. DIs for a specific goal are the same for everyone - no customization is needed. As a result, DIs are products for the masses and the world of investing suddenly becomes "productized." This is the Holy Grail of Investing and the implications are huge for both the investing public and the financial services industry. This game-changing topic is discussed in detail in Chapter 10 of The Dynamic Investment Bible. Every investor needs to read and understand this incredible evolutionary step in the world of investing.
9. Breaking the Client Advisor Dependency Bond - Dynamic Investments are so simple in concept and use that individuals of virtually all experience levels can implement and manage them on their own. Remember, DIs automatically signal the trades needed to take advantage of current market trends based on objective market observations not on human judgments. As a result, the current, almost total, dependency that individual investors have on financial advisors is broken and the investing public is free to take more personal control of their financial futures. When client "choice" enters the world of investing things will change rapidly, and for the better.
10. DIs Are a Truly Unique Investment Type - So what are Dynamic Investments? Are they a pooled investment type like a mutual fund or an ETF? No, they only hold one investment at a time - the one from its DEP that is trending up most strongly at DI review time. Are they a single equity like a stock or a bond? No, they contain a Dynamic ETF Pool (DEP) that holds multiple ETFs from which it can select to own based on market conditions. By changing the fundamental way we invest we need to coin new terms. I prefer to call DIs "portfolio products." They are "active" investments that are "passively" managed. See why Dynamic Investments are so much fun!
11. Solving the Active / Passive Investment Style Debate. In today's financial world there is an intense debate related to whether active or passive investing is the better approach. Passive investing entails buying mainly index funds or ETFs and simply holding them for the long term. Active investing entails a fund manager selecting which equities to buy based on subjective analysis - e.g. stock picking. Both approach have pluses and minuses as discussed in my Blog post accessed by clicking here. Dynamic Investments make this choice unnecessary by combining the best aspects of each while eliminating the worst aspects of each. Repeating the point made in item 10, above, DIs are "active" investments that are "passively" managed. The debate thus becomes moot.
12. Opening A Vast New World of Investment Development. Today's developers of Exchange Traded Funds (ETFs) are "hitting the wall". The explosive growth of this relatively new investment type from 2009 to 2016 has injected close to 1500 ETFs into the system. But the growth has slowed and even reversed itself as many ETFs have been delisted recently due to lack of trading volume. The problem is that most ETFs track a market index and there are only so many indexes out there; almost all of which are currently tracked by an existing ETF. So where does the ETF developer go for new products? With the introduction of Dynamic Investment Theory they can turn their focus to creating new and unique Dynamic Investments that combine existing ETFs into a superior investment. And there are an unlimited number of Dynamic Investments waiting to be created. The "wall" for ETF developers has thus been breached! See my Blog post on this topic by clicking here.
Fun Uses of Dynamic Investments
13. As an MPT Portfolio "Returns Booster" - Dynamic Investment Theory represents a totally new way of investing. As such the financial services industry will ease into it gradually. Fortunately the nature of DIs makes this is easy to do. DIs can be seen as simply another asset type in a traditional MPT portfolio. For example, MPT methods can be used to give an allocation of money to a Dynamic Investment as illustrated below. The returns "boost" of doing so is obvious and the more allocation given to the DI the higher the return will be "boosted." In this manner DIs can be gradually introduced to the investing world without significant disruption to current activities. Below I show and compare the average annual returns of three investment configurations for the period from the start of 2007 to mid-2016. You can see that the presence of a DI makes a world of difference.
- MPT Portfolio (Stock ETF 60%, Bond ETF 40%) - 8.6%
- Stand Alone Dynamic Investment (Core DI with Stock ETF and Bond ETF in the DEP) - 24.5%
- Hybrid MPT/DIT Portfolio (Stock ETF 30%, Bond ETF 20%, Core DI 50%) - 16.4%
An allocation to a Dynamic Investment can "boost" the returns of any MPT portfolio - and the larger the allocation to the DI, the bigger the boost. See more about Hybrid Portfolios by clicking here.
14. Creating Dynamic Assets - DIT methods can make any ETF a Dynamic Investment. This fact makes it easier to build extremely diversified and effective portfolios. For example, today an advisor using MPT methods will most certainly want to allocate a percent of your money to the stock market. But the stock market has many segments. Should you buy a broad stock market index such as an ETF for the S&P 500? Should you aim for higher returns with a small cap, growth stock ETF such as RZG? Or should you own a group of stocks that pay dividends with an ETF such as SDY? There is no way to make this decision other than to guess. Or you could just buy and hold all of them and hope for the best. A better solution is to implement a Stock Dynamic Investment that has multiple stock-related ETFs in its DEP and let the market choose which to buy based on which is trending up most strongly at a periodic review. Below is list of the choices available to you for a Stock-based portfolio component and their average annual returns during the period from 2007 to mid-2016:
- Just buy SPY - +6.7% / year
- Buy SPY, RZG, SDY with equal allocations of 33.3% to each and hold - e.g. MPT methods - +8.0% / year
- Buy a Stock Dynamic Investment with SPY, RZG, SDY in its DEP along with a Bond ETF - +19% / Year
Using a Dynamic Investment for your Stock Investment eliminates the impossible decision of what "type" of Stock ETF to place in an MPT-based portfolio. Using DI's the MARKET makes the choice and it is a lot smarter than any analyst!
15. Taming ETF Volatility - In the MPT world of buy-and-hold, many ETFs that have great returns potential today simply cannot be used because they are too volatile. They are too risky for virtually any MPT portfolio. PEK, an ETF for China stocks, is a good example. China stocks have a great potential for high returns but also for devastating lows. The Dynamic Investment buy-and sell management strategy solves the problem. To take advantage of PEK's upside potential while protecting it from downside risk, a portfolio manager (or YOU!) can simply insert PEK into the Core DI that contains a Stock ETF and a Bond ETF and then is reviewed on a quarterly basis. Here's an example of the difference.
- 2007-2015: Buy and hold PEK: +0.6% average annual return
- 2007-2015: Buy and hold the NAOI Core DI with PEK in its DEP: +44.0 % average annual return
In the Dynamic Investment PEK was only bought when it was trending up more strongly than stock or bonds and sold immediately when it started to trending down. In this manner DIs tame the volatility of any ETF and they all become candidates for inclusion in a DIT-designed portfolio. For more information go here.
16. Uncovering Hidden Value In ETF Product Lines - A host of companies create and sell complete product lines. But none take full advantage of the value that these product lines hold. I present an example of how DIs can uncover hidden value in an ETF product line in the For Professional area of this site here. I show how an ETF creator and vendor like Blackrock using iShares ETFs can create value where none currently exists. Let's look at these iShares and their average annual returns if bought at the start of 2007 and held until mid-2016.
- IVV - S&P Small Cap 600 Index ETF. 6.8%
- IJR - S&P 500 Index ETF: 7.9%
- TLT - Barclay's Long Term Treasury Bond ETF: 8.6%
If we simply put these three ETFs into the DEP of a single Dynamic Investment the results for the period are: Average Annual Returns = 19.6%
Combining ETFs in a product line in a single Dynamic Investment triples the return of buying and holding each. Was a lot of time and effort creating this new asset that puts to shame virtually any MPT portfolio in the market? No - absolutely not. We simply combined existing ETFs into the new Dynamic Investment structure. This is value that is currently lying dormant in an ETF product line. NAOI Dynamic Investments uncover it. See how much fun Dynamic Investments can be? For organization's that create and/or sell ETFs it is time for a happy dance!
It's Fun to Say Goodbye to:
17. High Expenses - Typical MPT portfolios created by a financial advisor are populated with managed mutual funds. Fees and expenses on these funds can be 1.5% and higher. This comes right out of your returns and higher fees do not correlate with higher performance. Dynamic Investments only work with Exchange Traded Funds (ETFs) that have far lower expenses. A typical ETF will have expenses of about 0.1% to 0.6%. Using DIs adds at least 1% to your total returns by lowering fees and expenses.
18. Fear of Market Crashes - We saw in 2008 how vulnerable MPT portfolios are to stock market crashes. Many people lost up to 40% of their portfolio value in the crash. The Core NAOI DI earned +33% in 2008 by quickly and automatically switching to bonds when stocks started to crash. Also DIs employ Trailing Stop Loss orders with each ETF owned - limiting their loss to a maximum of 7% during the short period they are owned. MPT doesn't use the very valuable stop loss risk reduction feature - why? - who knows, maybe its just too much work for advisors to explain them. Thus MPT portfolio holders need to fear stock market bubbles and crashes; DI holders don't.
19. Schemes, Scams and Fraud. DIs are predefined portfolio products. Once designed, they don't change - although the ETF they hold does. And the management of DIs is based on objective market observations. As a result, there is no room here for the interference and possibly corrosive effects of human judgments. As a result all manner of bad things go away. Among these are commission-biased sales, inaccurate forecasts, incompetent analysis, schemes, scams and fraud. DIs eliminate all of this.
20. Dependency and Being Forced to "Trust." Today most individuals are woefully under-educated in the world of investing. They are therefore forced to simply trust the guidance of advisors without question. DIs end this dependency. After studying them, the public will know the returns that are possible using this simplest Core DI and they should accept nothing less. They can question any advisor recommended investment that doesn't provide performance at least as high as the simplest DI. If an advisor can't, or won't, provide such high performance investments, an individual can either look for an advisor that does or implement DIs on their own using an online broker - completely bypassing advisors all together. DIs give control back to the public. And as a result the financial industry will be forced to improve the products and services they offer. Changes that the financial services industry will be forced to make due to the introduction of Dynamic Investments are discussed in detail in Chapter 11 of The Dynamic Investment Bible.
21. Sideways Developments. When performing research to find a better approach to investing I saw a lot of wasted effort. Developers were concentrated on how to improve increasingly obsolete MPT methods - in essence simply "putting lipstick on a pig." Even the creation of "robo-advisors" is a sideways development that does nothing but make an obsolete theory easier to use, not more effective. DIs give the financial services industry a more productive path for developing new investments and methods that significantly advance the field of investing - forward, not sideways.
It Is Fun to Invest and Relax
Think of how investing works today. You trust your financial security to a third party "expert" who builds for you a portfolio using design methods that were introduced to the market in the 1950's. And decisions on what to place in this portfolio are based on what are essentially guesses related to your risk profile and what the market will do in the future.
You get a portfolio that you don't quite understand and then are just asked to buy and hold it regardless of what the market does - or until your advisor gets around to reviewing it. So you stress-out every time the market dips because you know that at some point the market will crash again as it did in 2008. And you know that when it does you are likely to lose a lot of money. You are subjected to stress that is neither good for your financial health or for your personal health.
When your portfolio consists of one or more Dynamic Investments you can relax in the knowledge that your DI or DI portfolio is monitoring the market and automatically making changes to your holdings that both grow and protect you wealth without any guessing involved. Your Dynamic investment is giving you trade signals using objective market observations. And the market is smarter at predicting its future than ANY analyst or self-proclaimed expert. All of a sudden investing is not stressful but fun!