A Concise Overview of NAOI Dynamic Investments
In late 2016, the National Association of Online Investors (NAOI) changed the way investing works at a fundamental level. This was done via the release of a revolutionary approach to investing called Dynamic Investment Theory (DIT) an a unique investment type that it creates called Dynamic Investments. They will dominate in the future of investing. You will learn about them on this site.
The purpose of this page is to present a concise overview of what DIT and DI are along with links to pages that may be of most interest to you, the reader. This site will challenge you to reevaluate everything you have been taught about investing - and you will see that much of it is wrong. Let's get started.
What Is Dynamic Investment Theory?
Released to the public in early 2017 following 5+ years of research and 3 more of field-testing testing, Dynamic Investment Theory (DIT) defines a new, revolutionary approach to portfolio design and investing in general. To develop it we used scientific methods as explained below.
We started the development process with the ONLY thing we know about equity markets with a high degree of probability; that asset types, markets and market segments have cyclical prices and that their prices move up and down at different times. From this empirical observation we developed a hypothesis that predicts that at all times, in any economic condition, there exist positive returns somewhere in the market and that a new investment type can be created that automatically finds and captures them.
The results of extensive testing of this hypothesis showed that it had a high probability of being true, at which time we transformed the hypothesis into a theory. We then expanded the theory to define the logic and rules for creating a next-generation investment type called Dynamic Investments (DIs). This site is devoted to why and how they work and showing how they can be used to revolutionize the way we invest today.
DIT was created to be a superior alternative to the current standard approach to portfolio design called Modern Portfolio Theory (MPT). As discussed on the home page of this site, MPT was introduced in 1952 when markets were a far different place. Since then, markets have evolved significantly while MPT has barely changed at all, and it no longer works in modern markets. This was evidenced by the loss of investor wealth in MPT portfolios during the 2008 market crash. DIT was designed specifically to work in modern, more volatile, markets. During the stock market crash of 2008 a DIT portfolio earned 30% + while MPT portfolios were losing an equal amount or more. On this page and on this site you will learn how. Click here to see the major differences between the MPT and DIT approach to portfolio design.
What Are Dynamic Investments?
Dynamic Investments are a revolutionary investment type created using rules set forth by DIT. They are able to capture positive market returns whenever and where ever they exist in the market and with minimal risk. DIs primarily work with Exchange Traded Funds (ETFs) and are designed to automatically change the ETFs they hold based on a periodic sampling of market trends. They strive to purchase only ETFs that track asset types and markets / market segments that are moving up in price while avoiding or selling those that are moving down.
Below are the components of the generic Dynamic Investment with a diagram of its structure at right. Described just below are the variables that DI designers can define to create a full spectrum of DI products for meeting a wide variety of goals.
- The Dynamic ETF Pool or DEP: This component 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 will 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. The "winner" 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 of 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: This is proprietary NAOI component that substantially lowers the risk of all DIs while enhancing their ability to capture positive returns. This component is discussed in The Dynamic Investment Bible and will be revealed to any organization that works with the NAOI via a consulting contract.
The creation of effective DIs is both an art and a science. The NAOI has the tools and the education courses required to train individuals and organizations to design, create and implement them. A well designed DI will be a valuable asset for any financial services organization and people who have been trained by the NAOI as Certified DI Designers will be a among the most valuable people an organization can employ. The NAOI also offers an extensive catalog of existing DIs that we have proven to produce incredible returns, such as the one described just below, with very low risk. We will make their designs available to any organization with whom we work.
A Dynamic Investment Performance Example
The table presented below encapsulates how DIs work and the power they bring to the investing world. It shows the performance of four investment types during the 10-year period from the start of 2008 to the end of 2017.
The first two data rows show the returns for a standalone Total Stock Market ETF and a standalone Total Bond Market ETF for the test period. The third data row shows the performance of a traditional MPT designed portfolio with 50% allocation to the shown Stock and Bond ETFs using a buy-and-hold strategy. The bottom row show the results of the NAOI Primary Dynamic Investment that rotates between a Stock and Bond ETF based on which is trending up most strongly at a quarterly review. Note that the Primary DI uses different Stock and Bond ETFs than the MPT Portfolio.
The columns for each investment type show their yearly returns for the test period. The second to last column shows the Average Annual Return for each each investment and the last column shows the Sharpe Ratio which is an indicator of the amount of return produced for each unit of risk taken. The higher the Sharpe Ratio the better and any number above 1.0 indicates a superior investment.
You can see how the Basic DI switched between the Stock ETF and the Bond ETF to take advantage of the uptrends and to avoid downtrends of each asset type. By doing so it produced spectacular returns that no MPT portfolio in existence during this period could match. And the higher DI returns did not come with higher risk as shown by the Sharpe Ratio going up along with the returns - a result that breaks all of the rules of Modern Portfolio Theory! You can also see that because MPT portfolios are not dynamic and have no sensitivity to market trends, that their performance was mediocre at best and with high risk. This table shows, at-a-glance, why the use of DIs will be the investment of choice in the future of investing.
Why DI Performance Is So Superior to MPT Portfolios
Financial "experts" today will say that an average annual return of +30.6% with a Sharpe Ratio of 1.18 over a full decade as shown in the above table are impossible. And they are right in an MPT-portfolio based world. But this is a new DIT-based world and all manner of performance thought to be impossible today suddenly becomes probable.
Here are just a few of the reasons why Dynamic Investment are capable of producing such superior returns:
1. Market Sensitivity. DIs are "market sensitive" - MPT portfolios are not. DIs change the ETF they hold to take advantage of market uptrends and to avoid downtrends and by doing so produce performance that "static" MPT portfolios can't touch.
2. Intelligent Time-Diversification. Similar to MPT portfolios, DIs employ both company and asset diversification. But by having the internal intelligence to automatically change the ETF they hold to take advantage of current market trends, they add another element to the design in the form of "time-diversification". Asset and company diversification reduce both risk and reduce returns. Time-diversification reduces risk but also ENHANCES returns, enabling performance the type of performance shown in the above table.
3. Reduction of the "Human Risk" Factor. DIs signal ETF purchases and trades based on objective observations of market trends. MPT portfolios change based on human subjective judgments that are the source of so much that is wrong with the investing world today. Historical data shows that "the market" is a far better predictors of future market prices than any one or group of analysts. By reducing or eliminating the human risk factor DIs become a much superior investment in many ways as discussed throughout this site.
These three differences between DIT and MPT portfolios change the way we invest at a fundamental level and explain why Dynamic Investments, not MPT portfolios, will be the future of investing.
There are an unlimited number of DIs that can be created and there are an unlimited number of ways that DIs can be combined in a portfolio structure. Here are a few DI configuration categories:
Standalone Dynamic Investments. A standalone DI can be the only investment that a person owns. It is a diversified, total portfolio "product" that contains multiple ETF candidates in its DEP and automatically rotates among them to take advantage of market trends. A well-designed standalone DI can produce far higher returns than even the most sophisticated MPT portfolio and with less risk.
Dynamic Portfolios. Single DIs can be used as building blocks for even more diversified Dynamic Portfolios. A Dynamic Portfolio can hold from one to three ETFs at any one time - one from each DI building block. A DI portfolio can reduce even more the already low risk of holding a single DI.
Hybrid Portfolios. DIs can be one component of an MPT portfolio structure. The DI component will give standard MPT portfolios a significant returns "boost" and the greater the allocation to the DI, the better the MPT portfolio will perform. To learn how an NAOI designed Market Biased Portfolio will be the future default investment for all 401(k) and other Retirement Plans, click here.
Dynamic Investment Theory opens a vast new world of product development that doesn't exist today under the constraints of MPT portfolio design.
How Dynamic Investments Change the very Fabric of Investing
DIT and DIs will change the way we invest at a fundamental level. Among the most significant and exciting of these changes are the following:
1. The Productization of Investing. Dynamic Investments are the market's first comprehensive investment "consumer product". Not only do they specify the ETFs to work with in their DEP, they also have the internal intelligence to automatically manage these ETFs on an ongoing basis. Add to this that DIs have a universal goal of finding and capturing positive returns wherever they exist in the market while avoiding areas of the market that are trending down and we have the first, turnkey, comprehensive investing "product" in investing history. Each DI is a standardized, off-the-shelf consumer product that can be purchased by an investor from any number of vendors. DIs "productize" the world of investing. This is the Holy Grail of the financial world that mavens have been seeking for decades. They haven't found it. The NAOI has and as a result the world of investing changes at its very core.
2. Taking ETFs Mainstream. The use of DIs will significantly increase the sales of Exchange Traded Funds (ETFs) finally making them "mainstream" investments. In the opinion of many, the NAOI included, ETFs are the most significant advance in the world of investing in the past 30 years. Yet, ask an average person with money to invest what an ETF is and 9 out of 10 won't know. That's because MPT, buy-and-hold portfolios don't exploit the unique qualities of ETFs. And financial advisors won't recommend them because they don't provide a significant commission for their sale as do mutual funds. DIT methods change this entire dynamic. The full power of ETFs is unleashed with the Dynamic Investment framework that uses a buy-and-sell management strategy. This enables them to take full advantage of an ETFs unique characteristics. As a result, the coming massive demand for DIs will translate directly into significantly increased demand for ETFs. In addition, DIs will magnify the value of ETF developer product lines. They unlock the massive untapped value of ETF combinations that is currently lying dormant in the world of MPT portfolios. Go here to learn more about how DIs revitalized the ETF industry.
There are many other significant changes that DIT will bring to the world of investing. Go here to learn more.
There Will Be Skeptics
Despite the advantages of using Dynamic Investments as explained on this site, some in the financial services industry will see them as a threat because even the simplest Dynamic Investment significantly outperforms the most sophisticated MPT portfolios they sell - and they may think that the new approach will be disruptive to current revenue streams. Thus, there will be many who question the claims presented in the information provided on this site.
I, Leland Hevner, am willing to debate any skeptic of the Dynamic Investment approach at any time, in any venue and using any format. I have logic, experience and hard data on my side. My intuition tells me, however, that this invitation will not be readily accepted. The MPT status quo is just too profitable to allow it to be successfully challenged by the NAOI and the DIT approach. So, if your organization or media outlet offers a forum for spirited discussion, contact me and let's begin the debate. My contact information is presented below. Go here for a discussion of this topic.