Dynamic Investment Theory - A Better Approach to Investing!
As explained on the Home page of this site, the world of investing does not work for the investing public today. I became acutely aware of this fact in 2008 as I watched the collapse of portfolios created by industry standard Modern Portfolio Theory (MPT) methods. During this period I realized that teaching students of my college investing classes how to create traditional, asset-allocation, buy-and-hold portfolios was not only a waste of time but dangerous to their wealth. Before teaching another class, I vowed to find a better approach to investing.
The Search for a Better Approach to Investing
When I began my search, I certainly had no intention of creating an entirely new theory of investing. I was confident that I could find a way to make MPT work.
I was wrong. As I reviewed the world of investing innovation my hope turned to despair. I saw much hype about investing "advances" such as robo-advisors, smart beta investments, smart phone apps that provided buy/sell recommendations, etc. All had a lot of "flash" but to my mind, no significant improvement. What I saw was the proverbial "lipstick on a pig." No one was actively challenging the use of Modern Portfolio Theory. MPT seemed to be viewed by the financial services industry as "settled science" and not open to question.
I came to see why this was the case. First, MPT methods are so ingrained in the way that financial organizations work today that change to this fundamental theory of investing would cause major disruptions in the entire industry. I also saw that financial organizations that churn out MPT portfolios to their clients were doing just fine, making money hand over fist - even though their clients were not. With no incentive to kill the goose that continued to lay the golden eggs, it was little wonder that I could not find the better way to invest that I was looking for in the think tanks of today's financial industry or in academia.
I saw very clearly that MPT was a "brick wall" that was stopping the world of investing from advancing. So I came to the difficult conclusion that to find and develop the new approach to investing needed to evolve the world of investing and bring it into the 21st century, I would need to take on this daunting task myself. I knew that this effort would be difficult, time consuming and expensive and that there was no assurance that I would find it. But I had no option so I started.
The first step in any venture such as this is to set goals for the end product. I solicited the from the investing public. Here is what the average person with money to invest wanted to see in a new approach to investing:
- Higher investing returns with less risk
- Absolute protection from market crashes
- Less dependency on financial advisors / salespeople
- Simplicity - the option to invest on their own if they wished
To meet these goals I had to set my own goals for a new approach. Here they are:
- Define a framework for the development of "dynamic" investments to cope with today's dynamic markets
- Decrease subjective, human decisions in the investing process and thus the dependency of the public on professional advisors
- Increase the influence of scientific-method in the investing process
- Establish a methodology for creating standardized portfolio "products" that the public could buy "off-the-shelf" without the need for customization, i.e. "productize the world of investing" - the Holy Grail of the financial services industry
- Develop and "active" investment with "passive" management
These goals define a new theory of investing that is everything that MPT is not. The task would be difficult. But after teaching personal investing since 1997 and being a successful self-directed investor myself for over 20 years, I knew that the tools existed in 2008 to make it happen. All that was needed was someone with the incentive, time and skill to do it. I fit the bill. So I, backed by the resources of my organization, the NAOI, set out to find an approach that met the goals listed above.
Success! Introducing NAOI Dynamic Investment Theory
After 5+ of exhaustive research, development and testing I found the investing approach I was seeking in Dynamic Investment Theory (DIT) and the Dynamic Investment (DI) type that the theory creates.
Below I briefly describe the process and thinking for developing DIT. Our research, development and testing is more fully described in The Dynamic Investment Bible and will be discussed in detail with any clients the NAOI works with as part of a consulting contract related to the use of Dynamic Investments.
The Starting Point
We started our research with the ONLY fact that is known about equities markets with a high degree of probability; namely that the prices of equities that track entire asset classes, total markets and market segments are cyclical. They move up and down in price over time. And they move up and down in price at different times - e.g. when stocks go up, bonds go down (see chart below). This led us to the hypothesis that there exist at all times, in any economic condition, positive returns somewhere in the market.
With the formulation of this hypothesis, our goal then became to design a new investment type that was capable of finding and capturing the positive returns offered by equities that are moving up in price while avoiding equities that are moving down in price. We did exactly this by creating a new investment type that we called Dynamic Investments (DIs).
Using DIs to test our hypothesis showed with a high degree of probability that our hypothesis was correct. We were able to prove, with a high degree of confidence, that this new investment type could produce significantly higher returns than any MPT portfolio in the market and do so without excessive risk. And DIs are so simple to implement and manage that any individual can easily work with them on their own using an online broker and breaking the bonds of dependency that currently exist on professional financial advisors.
At the point when we had collected enough data to show that our hypothesis had a high probability of being correct, we upgraded our hypothesis to a theory and called it Dynamic Investment Theory or DIT for short. We had found a replacement for MPT; or at the very least a viable option.
This Is the Future of Investing - Change Is Not Optional
The introduction of Dynamic Investment Theory represents a fundamental change in how we invest today.
Whereas the current Modern Portfolio Theory design approach creates "static" portfolios that perform poorly in today's dynamic world of investing, DIT produces "dynamic" investments that thrive in today's volatile markets. By automatically changing the investment(s) they hold NAOI Dynamic Investments are able to produce average annual returns of 20%+ on a long-term basis. Reading other pages on this site tells you how.
The world of investing can remain stagnate no longer. As President of the NAOI, I come into contact with thousands of individual with money to invest every year. They are becoming increasingly unhappy and frustrated with the MPT-based status quo. Many are getting out of the market altogether and will not return until they are offered better investing products and services.
When they learn about Dynamic Investments they will demand them from the financial services industry. And if no financial organization offers them at first, people who read The Dynamic Investment Bible will simply implement and manage Dynamic Investments on their own without the aid of an advisor.
In the future of investing financial organizations who offer Dynamic Investments will thrive. Those that don't will fade away. Change will not be optional. That's just what evolution looks like.