DIs are designed to require minimal time and effort to manage. At periodic Review events, typically done quarterly, the DI uses the Trend Indicator to rank, as an example, the ETFs in the DI’s pool of potential purchase candidates. Only the ETFs with the strongest upward price trend are bought and held until the next Review event when the process is repeated. Thus, all trade decisions can be easily made based on an objective observation of easy to find market data, not on risk-laden subjective human judgments or complex computer programs, as many are today.
Hortz: How do Dynamic Investments perform?
Hevner: Extensive testing shows that the DI model works amazingly well. As an example, the simplest possible DI which holds only a Stock and a Bond ETF in its Dynamic ETF Pool and rotates between owning each based on their price trends, earned an average of +29% per year over the period from the start of 2008 to mid-August 2018. And these returns were achieved with minimal risk. In contrast, a traditional MPT portfolio with an allocation of 60% Stocks / 40% Bonds earned an average annual return of less than 7% during the same time period with significantly higher risk!
Hortz: How do you respond to someone who questions this type of relative return?
Hevner: Once MPT constraints are lifted, results that we have been told are told are impossible, suddenly becomes probable. Think about the differences here. First, a DI strives to hold ONLY ETFs that are moving up in price. MPT portfolios are designed to hold both winning and losing investments at all times. DIs are capable of changing the ETFs they hold based on a periodic sampling of market trends. MPT portfolios are static; they are blind to market movements. And, as a third reason, DI trades are made based on objective observations of market data while MPT portfolios only change based on human judgments that inject a massive risk element into the trade decision process.
Hortz: That sounds reasonable but what do the skeptics say?
Hevner: I’ve heard numerous reasons why DIs cannot possibly work and they all fall flat. The most frequent issue is the tax penalty related to frequent trading. In response I show that even after short-term capital gains taxes are deducted from DI returns they still provide returns that are multiple times higher than buy-and-hold, MPT portfolios. Also, most retail investing these days is done in retirement/tax-deferred accounts where short term capital gains don’t apply.
The next objection I hear is that people can’t “time the market” with success. I agree, people can’t. But DIT doesn’t ask them to. DIs work based on the observation that market trends can reliably predict future price movements in at least the short term. Finally, people say that this must be a trading system that will work for a short time and then stop. My response is that DIT will work as long as asset and market prices are cyclical. And no amount of “over-use” will eliminate that.
Hortz: Does anyone else offer the methodology that you are suggesting?
Hevner: Yes, a few organizations offer some form of trend-following / momentum strategy. But my research into their methods shows that none do it as simply, as profitably, or as reliably as the NAOI model. Remember, a goal set for us by the investing public was that the investment process be simple, eminently understandable and doable by the average investor with no black-box methods, intensive research or complex computations involved. DIs meet this goal. Other offerings do not.