NAOI Dynamic Investments (DIs) bring to the financial world a new approach to portfolio design and to investing in general. They are the most significant advance in the world of investing since the introduction of Exchange Traded Funds (ETFs) in 1992. DIs are a next-generation investment type designed specifically to thrive in today's volatile markets and will quickly replace portfolios designed using Modern Portfolio Theory (MPT) methods that are rapidly becoming obsolete. 

Created based on Dynamic Investment Theory (DIT), Dynamic Investments are the market's first investment type that is "sensitive" to market movements and has the internal intelligence to take advantage of them. DIs search for uptrending equities in the market and buy them, while selling or avoiding equities that are trending down. And they do so automatically based on objective observations of market movements, not on human, subjective decisions that are as often wrong as right. By doing so even the simplest DI is able to produce returns that are significantly higher than even the most sophisticated MPT portfolio in the market today with less risk. 20% average annual returns for NAOI Dynamic Investments over the long term are not uncommon.

This Web page provides a concise overview of how NAOI Dynamic Investments work and how they change the world of investing at a fundamental level.

A "Cheat Sheet" for Understanding Dynamic Investments

NAOI Dynamic Investments are a next-generation investment type that was created by Leland Hevner and the National Association of Online Investors based on 5+ years of research, development and testing. This is the investment type that the public demands. Here is a quick overview of its components and how it works.

1. The Dynamic Investment Components

DI Structure.png

Dynamic Investment Theory (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. 

  • 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 components a virtually unlimited number of DIs can be created 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.

2. 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 DI 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.

all numbers are percentages

all numbers are percentages

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.

3. What Makes DIs Such Superior Investments?

How is it possible for simple Dynamic Investments to earn returns that today's "experts" will say are impossible? Let's look at just a few of the many reasons:

  • Time Diversification. Like MPT portfolios, all DIs reduce risk by being company diversified through the use of ETFs and asset diversified by having multiple ETFs in their DEPs. But they add another risk reduction factor in the form of "time-diversification" which does not exist in MPT portfolios. Time diversification means that the ETF held by the DI changes with time. And while company and asset diversification only reduce risk, time-diversification reduces risk AND enhances performance to levels that non-time diversified, MPT portfolios can't touch! It is about time that this incredibly powerful investment design element was put to use.
  • Buying Winners / Avoiding Losers. DIs are designed to ONLY buy ETFs that track asset types / markets / market segments that are moving up in price at time of purchase - in other words "winning" ETFs. Odds are good that the trend will continue for at least another quarter. They are also designed to avoid or quickly sell ETFs that track areas of the market that are trending down in price, i.e. "losers". A good example is 2008 when all NAOI-designed DIs automatically switched from stock-based ETFs to bond-based ETFs and earned 50%+ for the year while the stock market was losing about the same amount! MPT portfolios suffered greatly in 2008 as they are designed to purposely hold both winners and losers at all times, an action that suppresses portfolio returns and still exposes the portfolio to excessive risk.
  • An Automated, Dynamic Management Strategy. DIs use a buy-and-sell management strategy to nimbly and automatically move between asset types and markets/market segments based on price trends. As a result, they are sensitive to market movements and designed to take advantage of them - without the need for human intervention. Market sensitivity is not present in today's static, buy-and-hold, MPT portfolios that move up and down in value at the whims of the market with no rules for selling to either take profits or to avoid losses - both of which DIs do automatically.
  • The Elimination of Human, Subjective Judgments. The intelligence built into each Dynamic Investment automatically signals trades based on empirical and objective observations of market trends. Trades are not made based on subjective, human judgments as they are in MPT portfolios. This methodology protects investors from all types of human foibles such as using bad data, incorrect analysis, inappropriate recommendations, sales bias, scams, schemes and fraud - all of which holders of MPT portfolio must contend with today.

In DIs we had found an investment type that could enable investors to participate in the market with confidence, without fear and with the real expectation of significant returns without excessive risk. Thus, we had met the goals originally set in 2008 when the seeds of investing evolution were planted. We had found a better approach to investing that I could teach with confidence. Upon meeting this goal to my satisfaction, I resumed NAOI investing classes teaching a better approach to investing - Dynamic Investment Theory.

4. 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. 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!

5. 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 or level of investing experience. They are, in fact, investing products for the masses, and their introduction brings about the "productization of investing" - the Holy Grail of the financial world.  

6. Dynamic Investments Benefit both Individuals and Investing Professionals

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, as discussed in Point 5, above, DIs are standardized "products." Clients and/or advisors will simply select those that best fit their needs from a catalog 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 in today's MPT investing world. Instead of advisors "guessing" how to make portfolio adjustments, DIs manage themselves automatically - signalling trades based on objective observations of market movements.

The use of DIs frees up time and expense currently spent on subjective market analysis. These are resources that can be redirected by financial advisors to more valuable offerings such as expanded financial planning education and service that benefit clients far more than advisor fees and mutual fund management expenses. 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.

7. A New Era of Investing Development

Today the world of new product development is hitting a brick wall. In the world of Exchange Traded Funds (ETFs) for example, virtually all asset types, markets and market segments have at least one ETF that tracks them and often several. The only areas that are not tracked are too volatile to fit into a buy-and-hold MPT portfolio. Thus, new ETF production is devolving into "strategy" ETFs that are too obscure for the average investor to understand.

The introduction of Dynamic Investments solves the problem perfectly. DIs are superior investing products that combine existing ETFs within a dynamic structure. They do not require the creation of a single new ETF. And their are an unlimited number of DIs that can be created along with an unlimited number of ways in which DIs can be combined in DI portfolios.

DIs open up a vast and virgin territory for new product development. Organizations that recognize this fact and are trained by the NAOI to take advantage of this new opportunity first will have a massive competitive advantage in a very competitive field.

8. DIs "Evolve" the World 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. 

Summary - Change Is Not Optional

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. 

When the public becomes aware of and educated about Dynamic Investments, they will demand them. Financial organizations that meet this demand will grow and prosper. Those that don't will die off. That is just how evolution works.