A Glimpse into how the World of Investing will Work
Using Dynamic Investments
On this site I discuss a new approach to investing called Dynamic Investment Theory (DIT) and a new investment / portfolio 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 should and must.
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 were not possible. But once the fundamental way we invest changes from MPT to DIT, the impossible becomes probable.
Major Changes Coming to the Investing World
The future of investing will not look like it does today. It can't because the way we invest today using MPT methods and portfolios that were introduced to the market in 1952 simply don't work in today's markets. Dynamic Investment Theory, the replacement for MPT introduced on this site, was designed specifically to work in modern, more volatile, markets.
When this fundamental change to how we invest occurs, 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 moving 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 completely ignore market changes. On the home page of this site you can see an example of the performance difference between MPT and DIT investments. In the example shown on that page, using the same ETFs, 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 targeting the same assets/markets.
2. Severing the MPT Risk / Reward Link
MPT says that the only way to earn higher returns is to accept higher risk. Dynamic Investment Theory (DIT) says that this is nonsense. With DIs, higher returns come from placing more ETFs in a DI's Dynamic Investment Pool (DEP) and thus increasing the size of the area where it searches for positive returns. When the risk / reward link is broken in this manner, Modern Portfolio Theory crumbles.
3. The Productization of Investing
This one is huge; I mentioned it on the Home Page. The goal of all MPT portfolios is to match the risk tolerance level of their holder. Thus, each is a customized creation. 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, DIs can be described as "consumer products" that can be bought off-the-shelf from any of a number of vendors. Because of these traits, DIs are consumer products and they "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, as a result, everything changes for the better.
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 ETFs and simply holding them for the long term. Active investing involves a portfolio manager selecting which equities to buy based on subjective analysis of market and economic factors - e.g. market timing. Both approaches have pluses and minuses as discussed in my Blog post accessed by clicking here. Dynamic Investments make this management 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! Holders of DIs can simply buy and hold them for the long term while the DI they own automatically signals the trades needed to take advantage of market changes. Such changes are based on observation of empirical data, not on subjective judgments.
5. Breaking the Investor / Advisor Dependency Bond
Dynamic Investments are so simple in concept and use that individuals of virtually all experience levels can implement and manage them on their own using an online broker. Remember, DIs automatically signal the trades needed to take advantage of current market trends based on objective market observations not on human judgments. As a result, the current, almost total, dependency that individual investors have on financial advisors is broken and the investing public is free to take more personal control of their financial futures. When clients have choices, the world of investing things rapidly change for the better as the cleansing effects of competition enter the market.
6. Reducing 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 empirical observation of market trends, not on human analysis and judgments. And studies show that "the market" is a far better predictor of future market 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 all of the risk of human involvement out of the decision process. As long as investors buy DIs that are created using certified NAOI methods, they no longer need to worry about the competence and/or honesty of an advisor should they choose to use one.
7. Unleashing the Power of Exchange Traded Funds (ETFs)
The entire financial services industry will become more effective 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, today 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, 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 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.
8. The Monetization of ETF Combinations
Many organizations own and market a complete ETF product line. But today, none of these organizations is taking full advantage of the value that these product lines hold. The use of Dynamic Investments uncovers massive amounts of value that is currently lying dormant in ETF product lines. This is the value found in ETF combinations.
Let's take a quick look at an example that illustrates this DI benefit. The following bullet points shows the average annual return of three Black Rock iShares for the 10-year period from 2007 to 2016. I then show the return of an MPT portfolio that holds all three and compare that to the return produced by a simple Dynamic Investment that holds the three ETFs in its Dynamic ETF Pool (DEP).
ETFs and ETF Combinations along with their Average Annual Returns from 2007 to 2016:
- IVV - S&P Small Cap 600 Index ETF. +6.8%
- IJR - S&P 500 Index ETF: +7.9%
- TLT - Barclay's Long Term Treasury Bond ETF: +8.6%
- MPT portfolio with equal allocation to each of the above ETFs: +8.7 % Sharpe Ratio: 0.55
- Simple Dynamic Investment with the above ETFs placed in its DEP: + 19.6 % Sharpe Ratio: 1.01
You can see that combining ETFs a single Dynamic Investment triples the return of buying and holding each or of holding them in an MPT asset-allocation portfolio. Was a lot of time and effort needed to release this additional performance? No - absolutely not. I simply combined existing ETFs into the NAOI Dynamic Investment structure. For the DI no human decisions were needed to "guess" at appropriate allocations of money and no new ETFs were created.
This short example shows that there is massive value currently lying dormant in an ETF product line. NAOI Dynamic Investments uncover it. We can show you how via NAOI Consulting Services discussed here. There is no expenditure that will give an ETF developer greater return on investment than an NAOI consulting contract. The NAOI will teach your organization how to develop a totally new DI product line by combining existing ETFs in NAOI Dynamic Investments and virtually overnight your product line will be worth multiple times what it is today and sales of your new DI products will increase revenues exponentially. This is one decision that is a no-brainer.
9. The Rise of "Dynamic" Assets as Portfolio Building Blocks of the Future
At the NAOI we are smart enough to know that DIT is not going to replace MPT overnight. So we have designed Dynamic Investments that fit within the MPT structure. These come in the form of Dynamic Assets as discussed briefly below using an example.
Today advisors using MPT methods will most certainly want to allocate a percent of a client's money to the stock market. But the stock market has many segments. Should they buy a broad stock market index ETF such as an SPY that tracks the S&P 500? Should they aim for higher returns with a small cap, growth stock ETF such as RZG? Or should they own a group of stocks that pay dividends with an ETF such as SDY? There is no way to make this decision other than to guess. A better solution is to implement an NAOI Stock Dynamic Investment that has them all in its DEP and let the market choose which to buy based on which is trending up most strongly at a periodic review. Below is an example list of the choices available to an investor or advisor for a Stock-based portfolio component and their average annual returns during the period from 2007 to 2016:
- Just buy and hold SPY: +6.7% / year
- Buy SPY (large-cap), RZG (small-cap), SDY (dividend stocks) with allocations of 33.3% to each and hold - e.g. MPT methods: +8.0% / year
- Buy a Dynamic Stock Investment with SPY, RZG, SDY and a Bond ETF in its DEP: +19% / Year
The third investment type, above, is what the NAOI calls a "US Stock Dynamic Asset" - it periodically and automatically selects for purchase the stock category that is moving up most strongly in current markets or the bond ETF if it is the DEP rankings winner. Thus a MPT / DIT "hybrid portfolio" may look like the following with different allocations to each Dynamic Asset:
- 50% US Stock Dynamic Asset
- 10% Foreign Stock Dynamic Asset
- 40% Bond Dynamic Asset
This portfolio would consider dozens of ETFs on a periodic basis and automatically choose to buy only those that are trending up the strongest at time of review and hold them until the next review. Such a portfolio will beat the performance of any standard MPT portfolio by a significant margin.
Dynamic Assets are the new Portfolio Building Blocks of the future. This topic is discussed in more detail on this Web page.
10. 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 "wall" for ETF developers has thus been breached! See my Blog post on this topic by clicking here.
11. New Tools for Portfolio Designers and Managers
Portfolio and asset managers in the DIT-based future of investing will have a wide spectrum of new tools for producing higher return, lower risk portfolios. Of course they can use standalone Dynamic Investments as a total portfolio. More common, at least at first, will be the integration of one or more DIs into an MPT portfolio. In MPT / DIT hybrid portfolios, DIs can be given an allocation of money just like any asset using MPT methods. This adds another element of diversification to the portfolio in the form of time-diversification that doesn't exist in today's MPT portfolios (time-diversification is discussed in more detail in this blog post). DIs can be seen as a significant "returns booster" to any MPT portfolio. Other DI configurations available to Portfolio Managers are discussed at this link. As an added benefit, Portfolio Managers can easily create their own DIs if they wish after taking advantage of NAOI training as discussed here. Those that use DIs in the creation and management of portfolios will have a massive advantage over those that don't.
12. 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 portfolio design methods that result in high expenses for no perceived value.
13. 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.
14. A New Public Perception of Investing
The way the world of investing works today The world of investing today does not work for the investing public. The fact that MPT is seen as the "settled science" methodology for portfolio design makes investing too unnecessarily complex for the average person with money to invest to navigate this world on their own. As a result they are force to depend almost totally on financial advisors, who are also salespeople, to build their portfolios for them. Most people end up not knowing what they own or why. This dynamic is keeping millions of potential investors out of the market in fear. I have discussed this topic in Points 5 and 6, above.
When DIT is a choice for portfolio design, this fear will go away. In the future of investing here is how the investing public will finally be enabled to participate in the equities markets with confidence.
First, understanding and using Dynamic Investments is so simple that it can easily be taught in an objective academic setting. The NAOI is also ramping up our DIT education courses and books. Students will learn that DIs offer higher returns with less risk than any MPT portfolio in existence. They will also learn that DIs protect them from market crashes; something that MPT portfolios don't do.
With an understanding of DIs, people can then "shop" for them. In Point 4, above, I explained that DIs are consumer products that can be bought off-the-shelf from any number of vendors. Hopefully they will be able to buy them from financial advisors, if not they use powerful DIs from the NAOI catalog and implement and manage them on their own using an online broker.
Once they have their DIs in place, individual investors can relax. They will be able to ignore world 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 cope with any market or world event to either take advantage of it or to protect them from it.
In addition, people who work with advisors who offer DIs using certified DIT methods can be assured that they are not falling prey to the "human risk" elements discussed above in Point 6 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.
And finally, because DIs produce high returns with low risk and absolute crash protection people that are currently on the sidelines will flock to the market by the millions. Financial organizations and advisors that offer them will capture this massive client base, Those that don't will fade away, fast.
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 Dynamic Investments.
The Start, Not The End, of Investing Evolution
These are just a few of the changes that will define the future of investing in a DIT-based world. We can accurately call this "next-generation" investing. DIT, DIs and the advances they enable in the world of investing represent the natural evolution of the field to adapt to change conditions.
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 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 this area of endeavor 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. In this book 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.