In mid-2016 the National Association of Online Investors Research Division changed the way investing works at a fundamental level. It did so via a targeted release of a new approach to investing called Dynamic Investment Theory (DIT) and the specifications for a next-generation investment type called Dynamic Investments (DIs). This target group received The Dynamic Investment Bible and gave us the feedback we needed to release this new approach to investing to the public at large in mid-2017.

DIT and DIs are described on this page and their application is explained throughout this site. This is the future of investing.

The Need for Change

As discussed on the Home Page of this site, the seeds for the development of a fundamental change in how we invest today, were planted in 2008 while I, Leland Hevner, was teaching a college course in personal investing in the Washington, D.C. area. As I had done since 1997, I was showing students how to create buy-and-hold, asset-allocation portfolios based on an approach defined by Modern Portfolio Theory (MPT). When the market crashed I watched in dismay as these portfolios crashed right along with it.

At that point, after over a decade of teaching MPT methods, I finally had to recognize that this approach - introduced to the market in 1952 -  was dangerously outdated and putting the wealth of my students at risk. This was unacceptable. I cancelled all future classes and redirected NAOI resources to the daunting task of finding a better approach to portfolio design and investing in general. I vowed to do nothing less than replace MPT as the unquestioned, universal standard for portfolio development.

The Search for a Solution

The state of investing research today - hitting the MPT "wall"

The state of investing research today - hitting the MPT "wall"

I began my search for a new approach to investing by looking at current areas of research and development. I found "new" products on the drawing board but not the "evolutionary" products that were needed to significantly advance the field of investing.

I looked at developments such as robo-advisors, intelligent portfolios, life-income funds, smart beta products and "quant" techniques among others. I saw them all as sideways, not forward, developments. Each was little more than "putting lipstick on the MPT pig." None challenged the supremacy of MPT portfolio methods.

I had to conclude that investing research today is still constrained by methods developed in the 1950's. My search for fundamental change in the world of investing hit a brick wall. Nothing I found was going to address the significant problems that investors are forced to deal with today by the outdated constraints of Modern Portfolio Theory.

Finding nothing that I could use, or even build on, in current research efforts, I decided to start with a clean slate to develop a new investing approach that could actually move the world of investing forward, into the 21st century

Goals for a New Approach to Investing

I realized that to meet the needs of the investing public I would need to start from scratch, with a blank slate. I would have to assume that MPT didn't exist. I vowed to use scientific methods to develop an original approach designed to work in modern markets. The first step in this process was to set clear and unambiguous goals. Fortunately from years of working with individual investors this was not a difficult task for me.

My goals for a new investing approach were simple and few. I wanted an approach that was easy for individual investors to understand, implement and manage - on their own if they wished. The approach needed produce high returns with low risk and give investors absolute protection from market crashes. I wanted the approach to be dynamic, able to automatically change the investments held to both take full advantage of market uptrends and to avoid market down trends. I wanted the approach to dramatically reduce, or even eliminate, the need for the error-prone, subjective human decisions that are the source of so many problems in the investing process today. And I wanted an approach that created off-the-shelf portfolio "products" that worked for everyone - not the customized creations that have been dictated by MPT methods for the last 6+ decades.

The Development Approach and Dynamic Investment Theory

To meet the goals I used a rigorously structured and scientifically based approach. I would start with what we know about the market with a high degree of probability and then build a hypothesis. The hypothesis would then be thoroughly tested and the results analyzed. If results did not support the hypothesis I would form another and test it. This process would continue until I had a hypothesis that produced the results I was seeking and a high degree of confidence, and that it would continue to produce such results in any future market and economic condition. When found, I would then transform the hypothesis into a theory that provided the foundation needed to create an investment type that could be used by the investing public. These, in short, are the steps of a scientific approach. 

I started with the ONLY thing that we know about equity markets with a high degree of probability - that asset classes, total markets and markets segments have prices that are cyclical and that these cycles move up and down at different times and in different economic conditions. This led to the hypothesis that at all times and in any economic condition there exist in the market positive returns and that a new investment type could be designed to find and capture them. I then tested the hypothesis with years of historic market data. After each test and data analysis I mad revisions as necessary in search of a set of parameters for this new investment type that met the goals for the new approach discussed just above on this page.

After 5+ years of research and development, plus 3 more years of testing, the NAOI and I succeeded in meeting our goals with the creation of Dynamic Investment Theory (DIT) as an alternative to, or replacement for, Modern Portfolio Theory. DIT sets forth the logic and rules for creating Dynamic Investments - a next-generation investment type that will dominate the future of investing.

A more complete description of the DIT / DI development process is presented in The Dynamic Investment Bible that can be reviewed on here on this site and purchased in the NAOI Store.

The Amazing NAOI Dynamic Investment

As mentioned above, DIT set the logical foundation for the creation of a generic investment type that could meet my goals. But it did not provide the details for how it should be built; that is not the purpose of a theory. There are many ways to implement the logic of the theory. My next step, then, was to create a Dynamic Investment based on DIT rules that the average investor could actually use.

In pursuit of this goal, first major decision was to use Exchange Traded Funds (ETFs) to power them. ETFs gave us the trading ease needed for the buy-and-sell strategy required of a dynamic investment. Another benefit was that there exists at least one ETF that tracks virtually every asset type and area of the market where we would want the new investment type to search for positive returns. We then turned to the task of finding an optimal structure and rule-set that could fully exploit the power of ETFs to find and capture positive returns where ever and whenever they existed in the market. After exhaustive testing we found a DI design that worked, and worked extremely well. It includes four simple components as illustrated in the figure shown nearby. They are as follows:

  • The Dynamic ETF Pool or DEP: This component of the DI holds from 2 to 10 ETFs that are candidates for purchase by the DI which only owns one of these ETFs at a time. The DEP defines the assets / areas of the market where the DI would search for positive returns.
     
  • The Review Period: This component specifies how often the DI samples market trends and ranks the ETFs in the DEP to identify the one trending up most strongly. This is the one ETF that the DI will buy and hold until the next review period.  
     
  • The Trade Signal: This is a simple price chart indicator that measures the direction and strength of the price trend for each ETF in the DEP. Only the one ETF that is trending up most strongly at time of review is purchased, or held if already owned, until the next review.
     
  • A Fourth Component: There is another very simple DI component that lowers its risk substantially. It is revealed in The Dynamic Investment Bible and will be discussed with any organization with whom we work.

Testing of this dynamic structure showed performance results that amazed even us! One example is shown below.

Dynamic Investment Performance

To test the effectiveness of the Dynamic Investments we used the simplest design possible, one that rotates only between a stock and bond ETF depending on which was trending up most strongly at a quarterly review. We called it the "NAOI Basic DI."

The table below shows the test results for this ultra-simple DI for the ten year period from 2007-2016, a full decade of data. It compares the DI performance with that of each standalone ETF in the DI's Dynamic ETF Pool (DEP) and with that of a buy-and-hold MPT portfolio with the allocations shown. It is important to note that the MPT portfolio and the NAOI Dynamic Investment use the same ETFs. Only the structure and management of the investment type are different. The MPT portfolio is "static", completely blind to market fluctuations. the Dynamic Investment is "dynamic", automatically changing the ETF it holds based on periodic samplings of market trends. Static vs. Dynamic - therein lies the difference. 

Note that the Sharpe Ratio shows the amount of return achieved for each unit of risk taken, the higher the better. Any Sharpe Ratio greater than 1.0 is seen as a superior investment.

 
 

These results are astounding. No MPT-based portfolio, no matter how sophisticated, can come close to matching the performance of this simple Dynamic Investment.

Our tests also showed that even higher returns are possible by adding more ETFs to the DI's Dynamic ETF Pool (DEP), giving the investment more areas of the market to search for positive returns. This is a game-changing development in the world of investing. MPT says that higher returns come only with higher risk. DIT proves this assertion wrong. By removing this false constraint, the entire world of investing is free to evolve into the 21st century.

The "Productization" of Investing

As we worked to develop DIT and DIs we soon realized that we were accomplishing something astonishing; nothing less than the "productization" of investing. This is the Holy Grail of the financial world. Dynamic Investments are consumer products! And when the world of investing becomes productized, powerful market forces and unleashed and everything changes for the better!

What makes a Dynamic Investment a "product?" There are two main factors as follows:

  • A universal goal. An investment product must have a goal that works for everyone. DIs have that in seeking maximum returns with minimum risk in all market conditions. MPT portfolios are not products. Each is a customized creation designed to match the investor's risk tolerance.
     
  • A comprehensive product. DIs not only specify the ETFs to work with but also how they will be automatically managed on an ongoing basis. There are no human judgments involved. This is key to making a portfolio a "product." MPT portfolios show the equities to work with but provide no guidance on how they are to be managed other than "buy and hold." Thus MPT portfolios are not products, DIT portfolios are.

DIs are the market's first and only active investment with passive management. Thus they can be bought and held by the investor while the DI automatically signals the trades to be made based on periodic sampling of market trends - not on error-prone, human judgments. Dynamic Investments can thus be bought "off-the-shelf" from a variety of vendors and simply held by an investor for the long term. Certainly an advisor can help in selecting the right DIs for an investor, but the DIs themselves are standardized portfolio products. This is investing evolution at its finest.

Opening a Vast, Virgin World of Development Opportunities

DI Theory and the NAOI developed DI structure open the floodgates to the creation of an unlimited number of Dynamic Investment "products" that can be created simply by combining multiple ETFs in the DEP of a new DI and specifying the values of each variable discussed above on this page. But there are also an unlimited number of ways that DIs can be combined in DI portfolios as well as with other investment types in DI / MPT hybrid portfolios. The introduction of NAOI Dynamic Investments opens a massive new world of powerful investment product development - all without the need to create a single new ETF! Go to this link to review several examples of DI Portfolio Products. And go to this link to read about how these product development dynamics will change with the introduction of Dynamic Investment Designers.

Dynamic Investment Field Testing

Dynamic Investments are more than just a laboratory creation. When they came out of our test lab in 2013 the temptation was strong to release them to the public immediately. But that's not how the NAOI works. They were not ready for release to the public without first being extensively field tested by the public. Of course the NAOI was using DIs in our corporate portfolio, but this wasn't the same as watching how average people with money to invest would work with them.

Fortunately the NAOI has access to hundreds of individuals, NAOI members and students, who were willing to volunteer to put DIs into their portfolios under the close supervision of the NAOI. While we in no way assumed the role of a fiduciary advisor during these tests, we did provide the education that enabled our testers to clearly understand the DI investment type in order to make their appropriate decisions for their unique goals. And we showed them how to manage the DI using an online broker.

Field testing began at the start of 2013 and continued to the end of 2016. Most of our volunteers decided to use the Basic DI (discussed above on this page) as one component of a traditional MPT portfolio to serve as a returns "booster" with varying allocations. Those that chose an allocation of 50% to the DI saw the results shown in the table below as compared to those a standard 50% stock / 50% bond MPT portfolio:

 
 

Our field testers were obviously very pleased with these results. But more important to the NAOI was their feedback related to their total experience of using DIs. None had a problem with the quarterly review process and making the few trades signaled by the DI during this test period using an online broker. All were pleasantly surprised with not only the higher returns but also with the fact that they didn't need to worry about the DI portion of their portfolio. While they were constantly concerned about how economic and world events were affecting the MPT portion of their portfolio, they knew that their DI was automatically changing the ETF it held to both take advantage of market uptrends and to avoid market downtrends. All student testers continue to use DIs to this day, in 2017, and are gradually increasing their portfolio allocation to them.

Only with this input from the public did we feel confident in releasing NAOI Dynamic Investments to the public at large which we did in mid-2016 with the release of The Dynamic Investment Bible (see below on this page), and to a wider audience via press releases in mid-2017.

Maximizing the Potential of Exchange Traded Funds

The NAOI understands that change of the nature discussed on this site does not come easy unless there exists a massive incentive for accepting it. Fortunately there is for virtually all players in the financial services industry but especially for ETF strategists, developers and users. The introduction of Dynamic Investments will cause the sales of ETFs to explode. Here's why:

In today's buy-and-hold world of MPT portfolios the fact that ETFs are easy to trade is no great advantage. As a result, today the public sees ETFs as little more than a "quirky" mutual fund if they have even heard of them at all. In the new buy-and-sell world of DIT investing, ETF advantages are fully exploited and their superiority over mutual funds is clear and evident. 

With the increased use of Dynamic Investments, the sales of ETFs will explode and they will become a mainstream investment with the potential to surpass mutual funds as the industry's primary investment vehicle.

Dynamic Investments will not only increase ETF sales and expand the market reach of ETF developers as shown above on this page, they will also benefit ETF developers in other ways. For example, DIs unlock the value inherent in ETF combinations that is currently lying dormant in a developer's product line. To see more incredible advantages that Dynamic Investments will bring to the world of ETF Developers, click here.

The New Role of Financial Advisors

A significant change in how investing works today does not need to be a bad thing for Financial Advisors. Certainly business plans that today rely on clients passively accepting whatever investments an advisor recommends will need to be scrapped, as they should be.

Using Dynamic Investments, new, better and even more profitable advisor business plans can be built. With the onus of trying to create a customized portfolio to meet the risk profile of each investor removed, advisors can concentrate more of their time on investor education and financial planning topics.

Education and information are what the investing public today needs, not recommendations based on expensive market analysis that is correct about 50% of the time. And, of course, using DIs the market signals trades as needed, not financial "experts." You saw on this page that the performance resulting from market signals are far higher than those signaled by market analysts.

Any advisor who offers DI investment products in conjunction with a full range of financial planning education and advice will hold a major competitive advantage over advisors who insists on the continued use of portfolio design methods that are decades old and no longer work.

Go here to learn more about how DIs will change the world of investment advice.


DIT for Professionals - NAOI Consulting

Virtually all financial organizations will benefit from, and gain a massive competitive advantage by, integrating Dynamic Investments into their strategic plans. Different companies will utilize DIs in different ways and a wide variety of new, very profitable, opportunities exist in this new world of investing. To view just a few click here.

To fully exploit the potential of using NAOI Dynamic Investments the NAOI offers customized consulting services that can be reviewed by clicking here and by reading the book shown just below.


 

DIT for Individuals - The Dynamic Investment Bible

Of course the whole intriguing story of why and how Dynamic Investments were developed cannot be told on this Web page or this Web site. It is told in the recently released book entitled The Dynamic Investment Bible.

Individual investors who read this book will learn not only what Dynamic Investments are and how they were developed, but also how to implement and management simple but powerful DIs using an online broker. Click here to compare how individuals are forced to invest today with how they will invest in the DI-based future.

You can learn more about this easy-to-read book by clicking here and purchase it in the NAOI store by clicking here.


Stay Up-To-Date on Dynamic Investment Advances!

The NAOI is constantly developing and releasing new Dynamic Investments and Dynamic Investment Portfolios. We are also continuously finding new real-world applications for DIs. To be notified immediately when news happens in the DI-world, join our Updates Email List at the bottom of this page and also drop by the site on a regular basis and read the Authors Blog

You can also follow Leland Hevner on Twitter or connect with him on LinkedIn as shown below in the Contact Information.


Contact Information

I can be contacted at LHevner@naoi.org or called at 813-949-3817 in Tampa, Florida. Also feel free to connect with me at linkedin.com/in/lelandhevner

To stay current on breaking news related to Dynamic Investments be sure to signup for Updates Emails at the bottom of the page and follow me on Twitter at  https://twitter.com/LelandHevner

Full contact information is found by clicking here.

NAOI dynamic investments - the next step in the evolution of investing

NAOI dynamic investments - the next step in the evolution of investing