On this site I introduce a new approach to investing called Dynamic Investment Theory (DIT) and a new investment type called Dynamic Investments (DIs). DIT does not simply "tweak" Modern Portfolio Theory (MPT), today's standard for portfolio design; it replaces it. And when the constraints of MPT are removed, the entire world of investing is free to evolve as it must in order to cope with today's market dynamics.
On this page I discuss just a few of the major changes that will take place in a DIT-based future of investing. They will surprise you. You have probably been taught that many of them are not possible. But once the fundamental way we invest changes from MPT to DIT, the impossible becomes the normal. (I suggest that you scan the DI Primer page before continuing.)
Major Changes Are Coming to the World of Investing!
The future of investing will not look like it does today. It can't. The MPT portfolio design methods that are in universal use today simply no longer work in modern markets. At it's no wonder; they were introduced in 1952 when markets were a far different place. This is about to change. Dynamic Investment Theory (DIT), that you are learning about on this site is the first approach to portfolio design and investing in general designed specifically to work in modern markets. And extensive testing by the NAOI shows that it works far better than decades-old MPT methods.
When this fundamental change, virtually every area of the investing world is effected. Below are just a few examples, Prepare to be amazed.
1. Higher Returns with Lower Risk and Portfolio Crash Protection
DIT sets the rules for the creation and management of a new investment type called Dynamic Investments (DIs). They are discussed at this link. DIs are designed to buy only ETFs that are trending up in price and to avoid or sell those that are moving down. They periodically and automatically change the ETF they hold in order to take full advantage of current market dynamics. As a result DIs produce significantly higher returns with lower risk than today's "static", buy-and-hold, MPT portfolios that ignore market changes. And DIs work with no active management required.
On the home page of this site you can see an example of the performance difference between MPT and DIT investments using the same ETFs. There you can see that a Dynamic Investment earned an average annual return of +30.6% during the decade from 2007 to 2016 while a traditional MPT portfolio earned only +5.0%. Virtually all DIs designed by the NAOI show the same massive performance gap over MPT portfolios that target the same assets/markets.
2. Severing the MPT Risk / Reward Link
Modern Portfolio Theory (MPT) says that the only way to earn higher returns is to accept higher risk. Dynamic Investment Theory (DIT) says that this is not true. With DIs, higher returns come from placing more ETFs in a DI's Dynamic ETF Pool (DEP) and thus increasing the size of the market area where they search for positive returns. When this risk / reward link is broken, Modern Portfolio Theory crumbles and its constraints fall away.
3. The "Productization" of Investing
DIs are consumer products and this change is huge. The goal of all MPT portfolios is to match the risk tolerance level of their holder. Thus, each is a customized creation - not a standardized consumer product. In stark contrast, DIs have as their goal capturing positive returns in the areas of the market tracked by the ETFs in their Dynamic ETF Pool. And each DI has the built-in intelligence to automatically signal the trades necessary to meet this goal. Thus, because DIs do not need to be customized for individual investors, they are products that can be bought off-the-shelf from any of a number of vendors. These traits enable DIs to "productize the world of investing". This is the Holy Grail of the financial world that experts have been seeking for decades. They haven't found it. The NAOI has and the doors to a new era of investing open wide.
4. Solving the Active / Passive Management Debate
In today's financial world there is an intense debate related to whether active or passive portfolio management is the better approach. Passive investing entails buying mainly index funds or index ETFs and simply holding them for the long term. Active investing involves a portfolio manager selecting equities to buy based on subjective analysis of world, market and economic factors. Both approaches have pluses and minuses as discussed in my Blog Post accessed by clicking here.
Dynamic Investments make this management style choice unnecessary by combining the best aspects of each while eliminating the worst aspects of both. NAOI Dynamic Investments are the market's first "active" investment that is "passively" managed, Purchasers of DIs can simply buy and hold them for the long term while their DIs automatically signal the trades needed to take advantage of market changes. And such changes are based on observation of empirical data, not on subjective judgments as they are today.
5. Taking ETFs Mainstream
The entire financial services industry will become more effective, efficient and profitable through the use of Dynamic Investments. 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, the public sees ETFs as little more than "quirky" mutual funds - if they have even heard of them at all. In the new, buy-and-sell world of DIT investing this perception changes,
Using Dynamic Investment Theory methods, the unique features of ETFs are fully exploited and their superiority over mutual funds is realized. With the increased use of Dynamic Investments, the sales of ETFs will soar and they will become a mainstream investment with the potential to surpass mutual funds as the industry's primary investment vehicle. Click here for more discussion on this topic.
6. The Monetization of ETF Combinations
ETF developers and vendors today are not exploiting the full value of their product lines. The use of Dynamic Investments uncovers massive amounts of value that is currently lying dormant in them. This is the value found in the combination of existing ETFs in the NAOI Dynamic Investment structure.
Let's take a quick look at an example that illustrates this DI benefit using iShare ETFs from Blackrock. The table below shows the average annual returns of several investment types for the 10 year period from the start of 2006 to the end of 2016 - a full decade's worth of data. Also displayed is the Sharpe Ratio for each that shows the amount of gain for each unit of risk taken. The higher this ratio the less risky the investment is and anything above 1.0 is seen as a superior investment.
The first three data rows shows the performance of 3 individual iShare ETFs with their symbols and market segment tracked shown. The fourth row shows the performance of an MPT-based portfolio that holds all three of these ETFs with equal allocations. And the bottom row shows the performance of a simple Dynamic Investment that holds the three ETFs in it Dynamic ETF Pool - with only the one trending up most strongly at time of review purchased and held until the next review.
You can see that combining ETFs a single Dynamic Investment significantly outperforms simply buying and holding each and also of holding all three in an MPT asset-allocation portfolio. This increased performance is value that is currently lying dormant in an ETF product line. Was a lot of time and effort needed to release this increased performance and additional value? No - absolutely not. NAOI designers simply combined existing ETFs into the new Dynamic Investment structure. And the DI produced this performance with no subjective decisions involved.
Of course not all combinations provide value. There is work required to find optimal DI designs and to exploit maximum value in an ETF product line. NAOI trained DI designers will be able to uncover it using methods and tools developed by the NAOI research team and taught by NAOI trainers. By doing so an ETF product line's value can be exponentially increased virtually overnight and a massive new layer of products added without the need to create a single new ETF! Read about DI Designer training classes here. Also click here to read more about this topic in the Author's Blog on this site.
7. The Rise of "Dynamic Investment" Portfolio Building Blocks
In today's MPT-based investing world, portfolio designers first decide which assets and markets / market segments to place in a portfolio and then how much money should be allocated to each. In an MPT world the portfolio building blocks are typically mutual funds or, less frequently, ETFs. So the portfolio designer needs to first select an asset type, then choose which of the dozens of mutual funds / ETFs that track it and what allocation of money to give to each. There is a lot of "guessing" going on here and the "human risk" factor is strong - a factor discussed more fully in Point 11 below.
In the DIT-based future of investing, portfolio design will be simpler and more effective. As you know by reading the Dynamic Investment Primer page, all DIs have a Dynamic ETF Pool (DEP) that contains multiple ETF candidates related to the focus of the DI - e.g. stocks, bonds, emerging markets, etc. And only the one trending up most strongly at the time of a periodic review is purchased and held until the next review. Thus, portfolio designers don't need to guess at which "type" of an asset class or market segment to include in a portfolio. They simply identify a group of candidates for the asset or market segment targeted and then let "the market" select which to own based on empirical observation of market trends. Let's look at a simple example using ETFs as are building block.
Assume that as a designer you want to include a Stock component in a portfolio you are creating. But there are dozens of stock types such as small-cap, large-cap and mid-cap. In each of these categories you can choose between growth and value goals. Then there are foreign stocks from multiple countries and regions and also emerging or developed markets. Each of these types has the potential to perform far better than any of the others. When faced with this impossible decision most designers just select for their portfolio a total market ETF such as SPY that tracks the S&P 500 index which are all large-cap value stocks. By doing so a lot of potential gains found in other areas of the stock market are missed.
In the future of investing this problem is solved. You can simply select a group of stock ETFs, place them in the DEP of a Stock Dynamic Investment, place this DI in the portfolio and let the market decide which is most profitable to own at the time of a periodic review.
Now you have three options for creating a Stock Building Block for your portfolio. I will illustrate these options using three stock "types" that you may wish to consider and an ETF that tracks each.
- SPY - 500 large-cap stocks
- RZG - Small-cap stocks
- SDY - High Dividend stocks
Here, then, are three options for your portfolio's stock component along with the average annual returns of each for the period from 2007 to 2016:
- Option 1: Just buy and hold SPY - +6.7% average annual return
- Option 2: Buy and hold all three ETFs with an equal allocation to each, i.e. MPT methods - +8.0 average annual return
- Option 3: Place all three ETFs in the DEP of a Dynamic Investment, along with a Bond ETF and let the market periodically decide which to buy based on strength of price trend until the next review event - +19% average annual return
The Dynamic Stock Investment wins hands-down, and will beat the performance of the other two options every time. And the same is true regardless of the asset or market segment targeted by the DI. This is why Dynamic Investments, not single ETFs or Mutual Funds will be the preferred portfolio building block of the future. This topic is discussed in more detail on this Web page.
8. The Dynamic Portfolio of the Future
DI portfolio building blocks will still need to be but together to build a complete Dynamic Portfolio. This is where a portfolio creator can add their own "touch" by their own allocations to the DI building blocks. Such a DI Portfolio may look something like this:
- 60% Dynamic Stock
- 20% Dynamic Emerging Market Stock
- 20% Dynamic Bond
So there is still room for an advisor or portfolio creator to make subjective asset allocation judgments in the DIT world. But these allocations will not be the life-or-death decisions that designers must make today when selecting standalone ETFs or Mutual Funds and then giving each an allocation. Mistakes made in the MPT, buy-and-hold world can severely limit a portfolios performance for a long period of time. Non-optimal asset allocation decisions made in a Dynamic Portfolio will be of little consequence if the DIs are designed based on methods taught by the NAOI via a training class as discussed here.
9. The DIT / MPT Hybrid Portfolio of the Future
From decades of working in the financial services industry, the NAOI knows that DIT will not replace MPT overnight. But the benefits of DIT methods and the performance of Dynamic Investments need to be taken advantage of as soon as possible. For this reason the NAOI has created a construct called a MPT/DIT Hybrid Portfolio.
As discussed in more detail on this page, such a portfolio can treat a Dynamic Investment as just another asset class with its own allocation. Following is an example:
- 30% SPY - a standalone Stock ETF
- 30% TLT - a standalone Bond ETF
- 40% NAOI Basic DI that rotates between a Stock and Bond ETF
We call this particular configuration a "Market Bias" portfolio. When stocks are trending up it will hold 70% stocks and 30% bonds as the DI will hold a stock ETF based on market trends. When bonds trend up, the portfolio will be 70% bonds and 30% stocks as the DI will hold a bond ETF. This is the perfect investment for a Retirement Plan such as a 401(k) Plan as discussed on this page.
10. The Rise of the Dynamic Investment Designer
With training from the NAOI, discussed here, virtually any advisor or portfolio creator can design a full spectrum of Dynamic Investments on their own. However, we see the rise of professional DI Designers having as their primary task creating "optimal" DIs for specific goals. These entities may be individuals, ETF creators or standalone companies created just for this purpose. The commonality will be training by the NAOI on how to use the methods set forth by Dynamic Investment Theory to create NAOI "certified" Dynamic Investments.
We then see these professional DI designers offering catalogs of off-the-shelf DI products that portfolio creators can simply choose from an license or buy. The NAOI is a DI Designer and offer a catalog of optimized DIs. Go to this page for a more detailed discussion of this topic.
11. Diminishing the "Human Risk" Factor
A major factor that makes Dynamic Investments so powerful is that trading decisions for each are made automatically by the DI based on an automatic, periodic and objective sampling of market trends, not on human analysis and subjective judgments. Studies show that "the market" is a far better predictor of future equity price movements than any one, or group, of analysts. Plus, human decisions are rife with a host of risk elements including bad information, incorrect analysis, sales bias and the potential of evil intent such as scams, schemes and fraud.
DIs take this "human risk element" out of the investing process. As long as investors buy DIs that are created using NAOI certified DIT methods, they no longer need to worry about the competence and/or honesty of the advisor or organization that offers them. This fact alone will bring millions of individual investors back into the market that are now on the sidelines in fear!
12. A Vast New World of New Product Development
Today's developers of Exchange Traded Funds (ETFs) are "hitting the wall". The explosive growth of this relatively new investment type from 2009 to 2016 has injected close to 1500 ETFs into the system. But the growth has slowed and even reversed itself as many ETFs have been delisted due to lack of trading volume. The problem is that most ETFs track a market index and there are only so many indexes out there; almost all of which are currently tracked by an existing ETF.
So where does the ETF developer go for new products? With the introduction of Dynamic Investment Theory they can turn their focus to creating new and unique Dynamic Investments that combine existing ETFs to create superior investment products. And there are an unlimited number of Dynamic Investments waiting to be created - the NAOI can show any organization how. The "wall" for ETF developers has thus been breached and a entire virgin world of new product development awaits! See my Blog post on this topic by clicking here.
13. The New Financial Advisor Role
Dynamic Investments should not be feared by financial advisors. Yes, the will require business models that rely on uninformed and dependent clients to be changed - as they should be. Such models will be replaced with new, better business plans that will bring in far more customers and revenue than outdated models based on the creation of MPT portfolios.
In the future, investing and financial planning will be clearly separated into two activities. Investing and portfolio creation will utilize Dynamic Investment Products. As discussed in points 3 and 5, above, these will be consumer products that can be bought off-the-shelf and quickly, efficiently and effectively assembled into a client portfolio that will outperform any customized MPT portfolio in existence today.
The time that an advisor saves in the investing arena by the use of DIs will then be put to better use in the financial planning arena. Years of teaching personal investing have shown the NAOI that financial education and planning are where most people need help. They need to understand the basics of investing and gain knowledge of specific areas such as Social Security benefits, wills, trusts, tax planning, budgeting, etc. And the public will gladly pay for this type of service. They adverse reaction to paying for expenses such as mutual fund "loads" and management fees.
The advisor who offers low-expense, DI investment products in conjunction with a full range of moderately priced financial education and planning advice and will hold a major competitive advantage over advisors who insist on the continued use of MPT-based portfolio design methods that produce mediocre returns with high risk, no protection from market crashes and high "management" fees.
14. The New Role of Academia
In the world of Academia, students are taught how to earn money. But nowhere are they given serious education on how to invest this money to both protect and grow it for the long term. One would think that a course that teaches such a critical life-skill as personal investing would be a requirement for students at every level from high school and up. But it isn’t. Serious and objective personal investing courses simply don't exist as a part of any degreed program. This is a travesty as students enter the workforce almost completely ignorant about investing.
However, I can’t place the blame for this vacuum entirely on academia. The financial establishment has created a world of investing that is so complex, confusing and devoid of logic that it can’t be taught with any degree of academic rigor. Investing today is an activity that is so filled with subjective human judgments and what I can only call "guessing" that it doesn't even qualify as a legitimate field of study.
An investing world based on Dynamic Investments IS a legitimate field of study. Dynamic Investment Theory is a rules based investing methodology developed creating using scientific methods. And there is little room in DIT for subjective human judgment - all trades are signaled based on objective observations of market data. In other words, DIT is a subject that can be taught with extreme academic rigor. And in the future, as the NAOI ramps up the marketing of its course curricula, the world of Academia will finally be able to teach individuals how to invest.
15. A New Public Perception of Investing
The world of investing today does not work for the investing public. The fact that Modern Portfolio Theory (MPT) is seen as the "settled science" methodology for portfolio design makes the world of investing too complex for the average person to navigate on their own. As a result they are forced to depend almost totally on financial advisors, who are also salespeople, for their investing needs and end up with little knowledge of what they have invested in or why. This dynamic is keeping millions of potential investors out of the market in fear as discussed on this page.
When DIT becomes an option for portfolio design, this fear goes away. In the discussion that follows, I show how the investing public will finally be empowered to participate in equities markets with confidence.
First, Dynamic Investments are simple to understand, implement and manage. Individual investors can learn about them by reading The Dynamic Investment Bible that can be bought on the NAOI site by clicking here.
With an understanding of DIs, people can ask their advisor to offer them; if they don't individuals can design, implement and manage them on their own using an online broker.
Once investors have their DI or DIs in place, they can relax. They will be able to ignore world, economic and market news that can destroy an MPT portfolio's value virtually overnight. DI owners know that their investment is automatically adjusting its holdings to react appropriately to any market catalyst in order to either take advantage of it or to provide protection from it.
In addition, people who work with advisors who offer DIs - using certified DIT methods - can rest assured that they are not falling prey to the "human risk" elements discussed above in Point 11, above, such as sales bias, incompetence, scams, schemes and fraud. The NAOI will be available to certify any DIs being offered to anyone who requests it.
This is the much brighter future of investing that the average person with money to invest will experience as a result of the introduction of NAOI Dynamic Investments to the market
Just the Start of the Evolution of Investing
The above points are just a few of the changes that will define the future of investing in a DIT-based world of investing. We can accurately call this "next-generation" investing. DIT, DIs and the advances they enable represent the natural evolution of the field to adapt to changing conditions - something they haven't done in over 60+ years since the introduction of Modern Portfolio Theory.
Is DIT the ultimate solution to investing success? I hope not. No book or person should ever make that claim. The field of investing must always be open to new ideas, methods and investment types. To evolve as it can, and must, requires a continuous search for better ways to invest and we should never again bring progress to a screeching halt by proclaiming one portfolio design method - such as MPT - as “settled science.” The nearby quote by Konrad Lorenz must ever be seen as true.
Like plants, animals and any other ecosystem in nature, if the field of investing is not adapting to the changing environment and evolving, it is dying. Today as I watch people struggle to deal with the world of investing that is so critical to their future security and happiness, I fear that the financial industry is approaching this fate. It must evolve to not only reach its full potential but also to survive in the face of growing public discontent. On this site I have shown one way that it can do so immediately through the use of Dynamic Investment Theory and Dynamic Investments.
I am convinced that DIT is a good “next-step” in the evolution of investing. But it must be seen as only one of a continuing series of next-steps that continue to improve the ability of average people with money to invest to take full advantage of one of the greatest wealth generating sources in the history of mankind – the U.S. equities markets.