The "Dynamic" Future of Investing
A Story Worth Telling
This section of the Web site is targeted at the financial media. It provides a synopsis of a "next-generation" investment type called Dynamic Investments created by the National Association of Online Investors and its President, Leland Hevner that has the power to radically change and define the future of investing. This page presents reasons why the NAOI feels that this is a story worth telling. We are confident that such a story will be of interest to a large audience of both individual investors and financial professionals. Also in this section of the site is a "Cheat Sheet" that describes in summary form what Dynamic Investments are, how they work and how they can be used. The other pages of this site provide a broader discussion of these topics.
Dynamic Investment Theory
Dynamic Investments (DIs) are one manifestation of Dynamic Investment Theory (DIT), a completely new approach to investing developed by the NAOI over the course of almost 5 years of intense research. The details of DIT were released to the public in July of 2016 in the NAOI published book The Dynamic Investment Bible that is discussed elsewhere on this site.
DIT is a superior alternative to Modern Portfolio Theory (MPT) that has been used to design portfolios since 1952; almost all investors hold MPT based portfolios today. While MPT produces "static", buy-and-hold portfolios with no sensitivity to market movements, DIT creates "dynamic" investments / portfolios that change the equities they hold periodically and automatically based on empirical observations of market trends. By seeking to buy ONLY equities that are moving up and avoiding or selling those moving down, Dynamic Investments are able to consistently produce average annual returns of 20%+ without excessive risk AND with absolute protection from market crashes. You will learn how by reading the above referenced DI Cheat Sheet and The Dynamic Investment Bible.
The Seeds of a New Approach
The seeds of Dynamic Investment Theory were planted as I, Leland Hevner, was teaching a class in personal investing in the Fall of 2008. I was showing students how to build portfolios using traditional MPT methods. During that class the market started to crash and the portfolios I was teaching my class to build were crashing right along with it. After over 10+ years of teaching MPT portfolio design methods I finally had to admit that this traditional approach to investing was obsolete in modern markets.
At that point I cancelled all further classes and began a search for a better approach to portfolio design and to investing general. The chart at right showed to me why this research was long overdue. MPT was introduced to the market in 1952 when markets were a different and far "quieter" place. Yet while markets have evolved significantly since then, the portfolio design methods we use to cope with them have barely changed at all. My goal was to "evolve" them to cope with modern markets.
Following 5+ years of research and development I found the approach for which I was searching in the form of Dynamic Investment Theory and use of the Dynamic Investments that it creates. Extensive backtesting showed that the DIT approach was significantly better at both enabling individuals to capture the positive returns made available by today's dynamic markets and to avoid the downside of their volatility. Test results showed that Dynamic Investments thrive in volatile markets and are capable of earning 20%+ per year regardless of economic conditions or market direction. This, while MPT portfolios gave investors mediocre returns in good years and devastating losses in bad years.
I concluded that Dynamic Investment Theory was the future of investing and my job changed from development to making the world of investing aware that a better approach to investing existed.
Meeting My Goal - 20%+ Average Annual Returns with Minimal Risk
After multiple years of research, testing and development I found the new approach to investing that I was looking for in the form of Dynamic Investment Theory and the Dynamic Investments that the theory defines. Dynamic Investments provide the high returns with low risk that I was looking for.
Following is the simplest example possible that compares MPT portfolio performance with DIT Dynamic Investment performance. The backtest period is the almost 10 years from 2007 to mid-2016 using the same asset classes - one ETF for Stocks and one ETF for Bonds - in each portfolio type.
- MPT portfolio with 50% allocation to Stocks and 50% to Bonds and simply bought and held - Return: +5.9% Sharpe: 0.38
- DIT Dynamic Investment with 100% allocation to the one ETF trending up most strongly at time of periodic review - Return: 26.8%, Sharpe: 1.06
Note that "Sharpe" is the Sharpe Ratio, a measure of the amount of return achieved for each unit of risk taken - the higher the better. It is obvious which Theory of Investing is superior.
Yet this is only one example. The NAOI has developed other, equally simple, DIs that have returns 30%+ average annual returns over the same decade-long backtest period. And all DIs created by the NAOI would have earned +33% in 2008 when the stock market crashed. Of course it did so by automatically switching its holding from stocks to bonds immediately upon detecting the downward trend of the market. After the crash NAOI Dynamic Investments switched back to stocks for most of the next 7 years as the market started a record breaking uptrend.
DIT crushes MPT with higher returns and lower risk! This could be the headline of any article written about Dynamic Investment theory and the Dynamic Investments it creates.
In 2015 I met my goal of developing a "next-generation" investment type in the form of Dynamic Investments that produce high returns with low risk in a very simple package. But in the process I also saw that DIs provided other, perhaps even more significant benefits. Among these are the following, each of which I will be glad to discuss in more detail with any member of the media - or any interested party for that matter.
- Dynamic Investments end the debate currently raging about active versus passive investment management. Active management typically relies on human judgments to make equity trades in a portfolio - i.e. "stock picking". Yet history has shown that active management consistently under performs passive management, an approach that involves simply buying and holding stock or bond index funds or ETFs. The current discussion about which approach is better assumes that this is a binary choice - to either rely on active or passive management. Dynamic Investments make this debate moot. They combine the best features of both active and passive management. As you can read on this site, DIs automatically signal trades based on empirical observations of market movements with no human judgments involved. Thus they are passively managed. But a DI does change the ETF it holds periodically to both take advantage of market uptrends and to avoid market down trends. Thus, it is an "active" investment. DIs can be accurately described as a "passively managed active investment" and the debate ends. By owing Dynamic Investments, Investors can have the benefits of both investing styles in one investment and without the negative aspects of each approach!
- Dynamic Investments (DIs) are the market's first comprehensive portfolio "products." They have as their goal the capture of positive returns potential that exists somewhere in the market at all times in any economic condition. This is a universal goal of all investors and, as such, DIs are investment products for the "masses."
- The above fact means that Dynamic Investments "productize" the world of investing. With each DI being a standardized portfolio "product" that is the same for all investors, they can be bought off-the-shelf by the public without the need for customization to meet each individual's risk tolerance.
- DIs are also the market's first "comprehensive" portfolio investment meaning that each not only specifies the ETFs to work with but how they are to be managed on an ongoing basis. MPT portfolios give no such management guidance except "buy and hold." With DIs the process for making trades is set by the designer at time of creation and includes the ETFs to work with, how often they are to be reviewed and, the trade signal used to determine which to buy. Thus, DI internal trades are made automatically without the interference of human judgment that is the source of so much of what is wrong with investing today. This makes DIs a "comprehensive," self-managed portfolio product. MPT portfolios are can make no such claim.
- The above characteristics of Dynamic Investments leads to the "productization of investing." This is the Holy Grail of investing that financial experts have been seeking for decades. They haven't found it; in Dynamic Investments I have.
- The productization of investing means that the current bonds of dependency that most individuals have on financial advisors is broken. In the future of investing, DIs can be bought from any number of companies or easily implemented by individuals on their own using an online broker. As a result, the cleansing effects of competition will revitalize an investing industry that is rapidly losing consumer confidence today for a number of reasons that I would be glad to discuss.
- Following is a list of today's portfolio design and management activities that go away when using Dynamic Investments:
- The process of trying to determine an individual's risk profile
- Determining an asset allocation for the investor
- Selecting the specific investments to put in each asset category
- Managing the portfolio on an on-going basis
None of these activities are required to take full advantage of the benefits of a DI. And by eliminating them, human subjective judgments and what I call "guesswork" goes away. As a result much that is wrong with investing today is eliminated.
- In the DI-centric future of investing the individual investor will be empowered to invest with confidence on their own. They will no longer be forced to passively accept the investment recommendations given to them today by advisors / salespeople. They will demand the simplicity, the high returns, the low risk and the low expenses of Dynamic Investments.
- Dynamic Investments are the catalyst needed for the world of investing to evolve and to get unstuck from the 1950's where it is mired today by the use of Modern Portfolio Theory. Financial organizations that offer DIs will thrive. Those that don't will fade away. That's how evolution works.
There are many more points of interest to discuss with the introduction of Dynamic Investment Theory and DIs. As a teaser I will mention one other:
- A bedrock principle of the way we invest today is that to earn higher investing returns one must accept higher risk of loss. Well, in the new world of Dynamic Investments this principle simply goes away. Higher returns in the Dynamic Investment world come from designing DIs that search a larger area of the market for positive returns during a review event.
This is an "earthquake" for investing traditionalists that causes Modern Portfolio Theory to crumble. And, by the way, very interesting stuff for any potential reader. I would also refer you to this page: DI Fun Facts.
Benefits to the Audience
This story will be of interest to the entire investing world as I discussed earlier on this page. Let's dig a little deeper into the benefits that the audience of your article on Dynamic Investments will gain by reading it.
Individual Investors. NAOI surveys of our students show that individuals who have learned how to create and implement Dynamic Investments love them. They are sufficiently simple to understand and work with that any person who has read The Dynamic Investment Bible can immediately implement and manage the basic DIs mentioned in the book. And these are investments that averaged over 25% annual returns over the past decade - from 2007 to mid-2016 when these words were written! Another reason why individuals love DIs is that they can implement and manage them without the assistance of a financial advisor if they wish by simply reading The Dynamic Investment Bible and using an online broker. DIs are finally an investment that breaks the bonds of dependency of the public on the financial services industry and this will be of interest to millions of individual investors.
Financial Professionals. Financial service organizations and professional advisors will also profit handsomely from the use of DIs. Because this is an investment type that produces exceptionally high returns with low risk AND with absolute market crash protection (via Stop Losses) millions of potential investors who are now on the market sidelines in fear will have the confidence to reenter the market. As a result financial firms will have a much larger prospect pool to sell to. And because DIs are portfolio "products" the excessive amount of time required now to customize portfolios for each individual's risk profile can be redirected to more effective activities such as extended financial planning services - which is what the public wants and is willing to pay for as opposed to fund management fees for which the average investor sees no value whatsoever.
The audience for a story about Dynamic Investments will be of interest to an audience that numbers in the millions!
There Will Be Push-back
Despite the advantages of using Dynamic Investments, some in the financial services industry will see DIT as a threat. When investment portfolios become standardized products that can be bought off-the-shelf from any vendor, financial advisors will loose the power they have now of selling to under-educated clients virtually any equity that they want or need to meet their sales quotas.
In today's MPT world of investing the financial services industry has all of the power while the investing public has virtually none. In the DIT future of investing the people will at least share the power. The NAOI will inform the public about the benefits of Dynamic Investments and they will then demand them. Organizations that provide DIs will thrive; those that don't will fade away. That's the power of the evolution of investing.
A story about DIT will spawn rigorous and sometimes heated debate. Of course this is the goal of news reporting. And I, Leland Hevner, am prepared to prove with empirical data the veracity all of the claims related to Dynamic Investments made on this Web page and on this Web Site as discussed next.
A Reality Check
To members of the media who may be skeptical about the idea that a complete overhaul of traditional investing methods and/or that returns of the level shown just above are possible, the NAOI invites you to contact us to examine every detail of our claims. I will show you, step by step, how DIT was developed using scientific methods, how the performance of DIs was verified through extensive backtesting and empirical observations. And I will defend my assertion that DIT will finally "productized" the world of investing.
We invite close scrutiny of our claim that the 25%+ average annual returns, produced by the simplest possible Dynamic Investment during the past decade are not an aberration but rather the expected results of a well designed dynamic approach to investing. And we are happy to demonstrate how this same "NAOI Core DI" earned +33% during the crash of 2008 while MPT portfolios were losing an equal amount or more. I will also gladly define my contention that higher returns DO NOT require exposure to higher risk as MPT dictates. They come with broadening the area of the market where a DI searches for positive returns by adding more ETFs to its Dynamic ETF Pool.
We further encourage the media to challenge the NAOI's contention that DIs will "productize" the world of investing with off-the-shelf investment portfolios that work for the masses - without regard for a person's risk profile. Productization of investing is the "Holy Grail" of the financial world that thought-leaders have been seeking for years. They haven't found it. I have via the use of Dynamic Investment Theory and the Dynamic Investments it creates.
So, Who Am I?
Of course to consider a story of this far-reaching nature any reporter must ensure that the source has credibility. My background and credentials are found by clicking here. I will summarize this information briefly below.
In addition to being the President and Founder of the National Association of Online Investors (NAOI) in 1997, I am also a self-directed investor, a certified Financial Advisor, a professor 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 and 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 average individual with money to invest. It is a viewpoint rarely heard, and a "side" rarely taken, in the financial media today.
I can be contacted at LHevner@naoi.org or called at 813-949-3817. The NAOI is located in Tampa, Florida so we are on East Coast Time. And feel free to connect with me at linkedin.com/in/lelandhevner
Also be sure to signup for Updates Emails at the bottom of the page and follow me on Twitter at @LelandHevner.