A "Next-Generation" Investment Type
Dynamic Investments (DIs) are a revolutionary investment type that did not exist before the publication of The Dynamic Investment Bible. This page presents a quick overview of how DIs work.
Finally, A "Dynamic" Investment to Cope with Dynamic Markets
The world of investing has been stuck crippled for far too long through the use of Modern Portfolio Theory (MPT) to design portfolios. MPT was introduced to the investing world in 1952 when markets were a far different place. Since then market dynamics have changed dramatically while MPT methods have barely changed at all. It time for investing to evolve along with the markets. This evolution comes in the form of NAOI Dynamic Investments that periodically and automatically change the equities they hold to take advantage of market movements.
Dynamic Investment Components
Key to the effectiveness of DIs is that they are designed to constantly monitor market trends and automatically make changes to take advantage of them. To do this, DIs are designed to contain the following components.
Here is a description of each component
- Dynamic ETF Pool (DEP) - Dynamic Investments work with Exchange Traded Funds (ETFs) as their primary investment type. The DEP contains a list of ETF "candidates" for ownership by the DI. When a DI samples the market during a periodic review, it ranks this list and buys only the ETF that is trending up in price most strongly at the time. Typically the DEP will hold a diversified set of ETFs and it can hold from as few as two ETF purchase candidates to over a dozen, at the discretion of the designer.
- Review Period - Each DI reviews the market on a periodic basis to determine which ETF in the DEP to purchase and hold until the next review. The DI designer defines the length of time between these reviews. Typically the Review Period is either monthly or quarterly. In the above illustration the Review Period is Quarterly. The ETF selected at Review time is bought and held until the next Review at which time the DEP is again ranked. If the ETF currently held is the "winner" again, then no trade is needed. If another ETF in the DEP is moving up more strongly, the currently held ETF is sold and replaced with the new top-ranked ETF in the DEP.
- Trade Signal - At Review time the ETFs in the DEP are ranked using a price chart trend-indicator. The indicator used by the NAOI to design its "Basic" DIs can be found in The Dynamic Investment Bible. However, the indicator used is at the discretion of a designer. The top-ranked ETF according to this signal is bought and held until the next Review. Note that the use of an objective price indicator to signal trades takes human subjective judgments out of the equation and along with them much of what is wrong with the way we invest today. Another benefit of this ongoing management process is that it can easily be automated - taking human error completely out of the equation.
- One Other Component - There is one other simple component that optimizes the performance of Dynamic Investments. It is discussed in The Dynamic Investment Bible and as a part of our Consulting Services.
These elements of a DI make the investment "dynamic" and responsive to market changes. DIs can accurately be described a "time diversified" investment - a factor that not only adds another risk-reduction factor to an investment but also a return-enhancing factor. MPT portfolios are NOT time-diversified and their performance suffers greatly because of it.
A Comprehensive Investment Type
Unlike traditional MPT portfolios, Dynamic Investments are "comprehensive" investments. This means that each DI not only specifies the equities/ETFs that it will work with - they are in the DEP - but also exactly how the DI is to be managed and trades made on an ongoing basis. Management rules are specified by the Review Period and the Trade Signal design components of the DI.
MPT portfolios are NOT comprehensive investments. They do not tell an investor how to manage the equities they buy other than to simply buy and hold until an advisor gets around to suggesting a change, an action that often never happens. The lack of firm portfolio management rules is a disaster in today's dynamic markets. Because DI management is based solely on intelligence designed into the investment, this remarkable investment type frees individuals from dependence on financial advisors and their recommendations. DIs can be bought "off-the-shelf" and finally the world of investing is "productized." This is a huge evolutionary step and one long past due.
A Third Way to Invest
With the introduction of Dynamic Investments, we now have a third way to invest. Following are the three investment types that now exist. For each I show an example of the investment type, its Average Annual Return (AAR) for the past decade, 2007-2016, it Sharpe Ratio (a measure of risk - the higher the better) and the type of diversification used:
- Standalone Investment - SPY (a stock market ETF), AAR: +6.8%, Sharpe: 0.31, diversification: company
- Standalone Investment - TLT (a bond market ETF), AAR: +6.6%, Sharpe: 0.39, diversification: company
- Asset Allocation Portfolio - (e.g. 60% SPY, 40% TLT), AAR: 7.5%, Sharpe: 0.52, diversification: company and asset
- NAOI Core Dynamic Investment - (Stock and Bond ETF in the DEP): AAR: 24.5%, Sharpe: 1.08: diversification: company, asset and time
You can see that the addition of a "time-diversification" factor by the Dynamic Investment type increases returns significantly while not requiring that the investor assume additional risk! This is a game changing investment type that will define the future of investing.
The Dynamic Investment Performance Benchmark
There are more benefits provided by DIs than I can list here - you will read about them in The Dynamic Investment Bible and in another area of this site entitled "Dynamic Investment Fun Facts". But I will mention just one more that is important. In today's world of investing we have no standard measure of performance to compare the effectiveness of one MPT portfolio against another. This isn't possible because each MPT portfolio is a customized creation designed to meet the holder's risk profile. Without a standard performance measure there is really no way to tell if the portfolio you hold is good, bad or just mediocre. With the introduction of DIs there is. The NAOI Core DI that was mentioned on the Home Page of this site simply rotates between stocks and bonds depending on market trends. As such it is a pure measure of the positive returns potential that the market offers at any specific time.
The Core DI performance is therefore the perfect benchmark against which the performance of all portfolios can be measured. If your portfolio has lower performance than the Core DI, it can be seen as an inferior investment that is not taking maximum advantage of the positive returns potential the market is offering and you should demand better from the advisor who recommended it.
Here, again, is the performance of the Core DI Benchmark for the past 9+ years:
Note that "Sharpe" refers to the Sharpe Ratio, a measure of how much return is received for each unit of risk taken. Anything over 1.0 is a superior investment.
These are the returns that the market was offering during this 9.5 year period. How well did your portfolio capture what the market was willing to give to you during this time period? Probably not even close - look at 2008 for example. After answering this question ask another one. Would you have been better off by simply owning the simple NAOI Core Dynamic Investment than the fee-laden, advisor-recommended MPT portfolio you held? If the answer is "yes" then you need to read the The Dynamic Investment Bible as soon as possible and take back control of your portfolio or demand that your advisor make DIs available to you.
Only through the use of DIs will you be able to capture the positive returns that the market is offering in any economic condition.
What About Taxes?
Since DIs employ a buy-and-sell management strategy they will incur short-term capital gains taxes. But their are two reasons why this is not a deal-killer. First, the returns produced by DIs are so much higher than those produced by traditional MPT portfolios that even after short-term capital gains taxes their returns are still higher than investments that are held for the long-term. And second, most public investing today occurs in tax-deferred accounts such as IRA and 401(k) plans where short-term capital gains are not incurred. Investors in these plans pay personal income tax rates on the money when it is withdrawn at time of retirement. Thus there is no penalty for using the DI's buy and sell strategy.
Investing is Simpler, More Profitable and More Fun
Using Dynamic Investments!