Any change in the financial world as significant and potentially disruptive as the introduction of Dynamic Investment Theory, Dynamic Investments and Dynamic Portfolios will meet resistance. Listed on this page are several criticisms of this new approach that we have heard from financial professionals. The NAOI response to each of them is also presented. Following this list is a short commentary that discusses why the NAOI welcomes the input of skeptics and how this type of information is critical to our goal of restarting the evolution of investing.

Reasons Why the Dynamic Investment Approach Won’t Work

As one step of the NAOI R&D effort to find a better approach to investing the NAOI asked financial professionals to peer-review our Research Report. While many reviews were positive, there were also skeptics and this was both expected and welcomed. We used some negative input to make changes to and improve the NAOI Dynamic Investment approach. We viewed other negative comments as being simply wrong. Listed below are just a few of the criticisms we heard and the NAOI’s response to each. More are discussed in the NAOI Research Report. None have survived close scrutiny.

The DI-Based Investment Performance Claims are Impossible

Yes, the returns produced by DI-based investments are impossible using MPT methods where portfolios are designed to hold both winning and losing investments at all times. But DIs are designed to hold only winning investments and to avoid, or quickly sell, losing investments. This portfolio design and management approach is, thus, capable of producing returns that are significantly higher than that are possible today using industry standard MPT methods.

The Buy-and-Sell DI Management Strategy Used by DIs Incurs Short-Term Capital Gains

If the returns of DIs where just a few percentage points higher than those of today’s MPT portfolios this would be a valid point. But as readers of this Web site and the NAOI Research Report will learn, returns of well-designed DIs and DPorts produce higher returns that make an increase in the taxes incurred insignificant. Another reason why this criticism is invalid is that most individual investing today is done in retirement accounts where capital gains don’t apply.

Dynamic Investments Are Not New

Yes, there are existing ETFs that use market factors to determine the equities they hold. In fact the NAOI uses Momentum ETFs in several of our DI designs. We have studied dozens of factor-based ETFs and investing “systems”. None that we have examined come close to the simplicity and the performance of the DIs and DPorts that are explained in the NAOI Research Report.

People Can’t Time the Market

DIs change the ETFs they hold based on a periodic sampling of market trends. This is a form of “market timing” and skeptics tell us that people cannot do this successfully. The NAOI agrees; people can’t time the market with any degree of success. But historical analysis tells us that the market trends used by Dynamic Investments can.

Financial Organizations will Resist the Use of DIs

DIs do have the potential to significantly disrupt the way investing works today. But they don’t have to. In the Research Report the NAOI shows how the benefits of DIs can be realized by simply adding them as building blocks to the MPT portfolios that advisors recommend today in order to increase their returns and lower their risk. Used in this manner DIs don’t significantly disrupt current operations - they simply improve them.

Restarting the Evolution of Investing

The NAOI is well aware that the financial services industry today is locked-in to the use of MPT methods for the design and management of investment portfolios that match each investor’s risk profile. Millions, if not billions, of dollars have been spent on systems that determine asset class correlations and how to combine them in a portfolio to match each investors risk profile. Millions more are spent on systems that determine when and how to “rebalance” portfolio asset allocations to maintain initial risk levels.

The fact that DIs have the universal goal of maximizing returns while minimizing risk in all economic conditions, could make existing portfolio design methods obsolete. Why? Because DIs don’t care about an investor’s risk profile - they have the universal goal of maximizing returns and minimizing risk in all market conditions. This goal works for all investors. Also, DI-based portfolios are rebalanced automatically to take advantage of current market conditions. This is an entirely different, and more effective, approach to portfolio design and management.

So, even though DIs and DPorts produce higher returns with lower risk than MPT-based portfolios, they will not be easily accepted by an investing world that is so heavily invested in 1950s era, MPT-based systems. As a result, skeptics will abound.

But the world of investing must, and will, evolve from today’s MPT-only era of investing. The introduction of DIs is a start in that direction. And the NAOI has made the transition easy by showing how DIs can be inserted as building blocks in MPT portfolios to both increase their returns and reduce their risk. Allocation of money to these DIs can then be gradually increased as both investors and advisors see the advantages of using the market-sensitive Dynamic Portfolios as discussed in the NAOI Research Report.

Yes, there will be skeptics of the DI investment type and the Dynamic Portfolio design/management methods. But the evolution of investing cannot be stopped. The way investing works today WILL change to better meet the challenges of modern markets and the wants/needs of investors. The introduction of DIs and DPorts are a solid first step. Financial organizations would be wise to begin planning now for a new era of investing in which MPT is an option, not a requirement. A good place to start is by reading the NAOI Research Report entitled “A Blueprint for the Future of Investing” that can be accessed via the “invitation” Web page.

“All truth passes through three stages.
First, it is ridiculed. Second, it is violently opposed.
Third, it is accepted as self-evident.”

Arthur Schopenhauer