In early 2017 the National Association of Online Investors Research Division changed the way investing works at a fundamental level. It did so by releasing a new approach to investing called Dynamic Investment Theory and the specifications for a next-generation investment type called Dynamic Investments. This revolutionary approach and investment type are described on this page. They are the future of investing.

naoi dynamic investments usher in a new era of investing!

naoi dynamic investments usher in a new era of investing!

Dynamic Investments (DIs) are the result of 5+ years of research, development and testing. They are designed to automatically change the Exchange Traded Fund (ETF) they hold based on a periodic sampling of market trends. By doing so DIs enable investors to capture the positive returns that are available somewhere in the market at all times and in any economic condition. 

As verification that Dynamic Investments work, during the ten year period from 2007 to 2016 the simplest DI possible, one that automatically rotates only between stocks and bonds, earned an average annual return of over 30% without excessive risk and with complete market crash protection. 

An unlimited number of unique and powerful Dynamic Investments can be created. And there are an unlimited number of ways in which DIs can be combined to create even more powerful dynamic portfolios. You will learn how below on this this page and elsewhere on this site. But first let's take a quick look at the catalysts that prompted the NAOI to create a new, outside-the-box, approach to investing.

The Need for Change

Allow me to introduce myself as Leland Hevner, President of the National Association of Online Investors (NAOI) and chief architect of Dynamic Investment Theory. As a teacher of personal investing at the college level for over two decades, I know that the world of investing does not work for average individuals with money to invest. It is so complex, overrun with information and filled with subjective judgments that individual investors have little hope of navigating it on their own. Thus, they are forced to work with financial advisors and to simply accept the investment recommendations they are given without question. It is unacceptable that today's investors have little option but to entrust their financial security to salespeople.

The root of the problem is not hard to identify. Virtually all investment portfolios today are designed using an approach called Modern Portfolio Theory (MPT). It dictates that portfolios be created to match the risk tolerance of each investor. This is done via asset allocation primarily between stocks and bonds, and then the portfolio is meant to be held for the long-term.

One of the problems with MPT is that it creates "static" portfolios that have no sensitivity to market movements. They neither enable investors to take full advantage of market uptrends nor to avoid market downtrends. As a result, MPT portfolios provide mediocre returns at best with high risk and virtually no protection from market crashes. 

MPT is seen by the experts today as the "settled science" portfolio design approach. Yet in today's markets this simply makes no sense. Just look at the chart presented nearby. You can see that MPT was introduced to the market in 1952 when the market was a far different place than it is today. While markets have evolved significantly since then, the methods we use to cope with them have barely changed at all. And they no longer work in 21st century markets. It is way past time that the world of investing evolved to cope with modern markets. The NAOI took on this challenge following the market crash of 2008. 

The Catalyst for Change

The seeds for the development of significant change were planted in 2008 while I 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 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.

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 but not the "evolutionary" products that were needed. I looked at developments such as robo-advisors, intelligent portfolios, life-income funds and smart beta products among others. I saw each as sideways, not forward, developments. Each was little more than "putting lipstick on the MPT pig." None challenged the supremacy of MPT portfolio methods. My research revealed to me that investing today is stuck in 1952. My search for a better approach to investing in areas of current research hit a brick wall. 

Finding nothing that I could use, or even build on, in current research 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

My goals for a new investing approach were simple and few. I wanted an approach that was easy to understand, produced high returns with low risk and gave investors absolute protection from market crashes. I wanted the approach to dramatically reduce, or even eliminate, the need for the error-prone, subjective human decisions that are rife in the investing process today. And I wanted an approach that created portfolio "products" that worked for everyone - not the customized creations dictated by MPT today.

To meet these goals, 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 they move up and down in price at different times. This led me to the hypothesis that at all times and in any economic condition there exist in the market positive returns. My goal then became to design a new investment type that could seek out positive returns where ever and whenever they exist in the market and capture them automatically based on empirical observations of market trends, not on human judgments.

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

The Amazing NAOI Dynamic Investment

When designing Dynamic Investments, our first major decision was to use Exchange Traded Funds (ETFs) to power them. They gave us the trading ease needed for the buy-and-sell strategy required of a dynamic investment and 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.

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.

Dynamic Investment Configurations and Development Opportunities

DI Theory opens the floodgates to the creation of an unlimited number of standalone DI "products" that can be created simply by combining different ETFs in the DEP of a new DI. And 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.

The "Productization" of Investing

As we worked to develop Dynamic Investment Theory we soon realized that we were accomplishing nothing less than the "productization" of investing. This is the Holy Grail of the financial world. Dynamic Investments are consumer products! And when investing becomes productized, everything changes!

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."
     
  • The best of two management styles. 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.

Dynamic Investment Field Testing

Dynamic Investments are more than just a laboratory creation. They came out of our test lab in 2012 and 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. 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 very please 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 and some increased the allocation to it.

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 at the start of 2017.


The New Face of Investing

Dynamic Investments (DIs) have the power to affect virtually every area of the investing world. As a result, new opportunities abound. I have illustrated some of them in the chart just below. Let's look at how each entity in the chart will benefit in a world of NAOI Dynamic Investments.

ETF Developers will be able to design and create an entire line of new products simply by combining existing ETFs in the Dynamic Investment structure. Thus, the value of an ETF organization's product line can double, triple or more virtually overnight without the need to create a single new ETF! And each DI is a portfolio "product" that can be marketed and sold to an expanded market as illustrated in the chart by the red arrows.

Dedicated DI Developers will arise in this new world of investing. When DIs become well-known and widely used, organizations (or entities within existing organizations) will form that are dedicated to DI design, development, creation and sales. Such entities will be able to select ETFs from multiple developers in order to construct optimal Dynamic ETF Pools and powerful, proprietary DIs. And startup costs are minimal - all that's needed to become a major DI developer is training by the NAOI via a consulting contract as discussed below on this page.

 
 

Advisors, Portfolio Managers, Asset Managers will all benefit greatly from the arrival of Dynamic Investments. Each DI is a standardized portfolio product that can either be used as a standalone client portfolio or as one component of either a multi-DI portfolio or an MPT / DI hybrid portfolio. And each DI will provide exceptional returns with low risk. These are very powerful resources for any person or company that creates or manages client portfolios. Those that use them will have a tremendous competitive advantage over those that do not.


The New Role of Exchange Traded Funds (ETFs)

The entire financial services industry will be affected by the introduction of Dynamic Investments and for the better. But ETF developers and vendors will most likely see the greatest benefits. 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.


NAOI Consulting

Virtually all financial organizations will benefit 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 opportunities exist in this new world of investing.

To fully exploit the potential of using NAOI Dynamic Investments in a manner that gives you a massive competitive advantage in a crowded market, the NAOI offers customized consulting services that can be reviewed by clicking here.


 

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. You can read about it by clicking here and purchased by clicking here.

 


About Leland B. Hevner

Of course when considering a change as significance as that represented by Dynamic Investments, any interested party must ensure that the source has credibility. My background and credentials are found by clicking here. I summarize this information below.

I am the President of the National Association of Online Investors (NAOI), an organization that I founded in 1997. The organization has grown to become the market's leading provider of objective, college-level investor education.

I am a self-directed investor, a certified Financial Advisor, a teacher of personal investing at the college level, a consultant to financial organizations and governments, an author of multiple best-selling personal investing books, an investment researcher/innovator and have been a frequent commentator on major TV and Radio networks.

I have also been quoted extensively in the print media including the Wall Street Journal, Barons and US News and World Report among others. My niche area of expertise is my unwavering advocacy for the fair treatment of the average individual with money to invest. It is a viewpoint rarely heard, and a "side" rarely taken, in the financial media today. You can review my media exposure by scanning the NAOI Pressroom.


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