DIY Financial Advisor

DIY Financial Advisor: A Simple Solution to Build and Protect Your Wealth

DIY Financial Advisor is a synopsis of our research findings developed while serving as a consultant and asset manager for family offices. By way of background, a family office is a company, or group of people, who manage the wealth a family has gained over generations. The term 'family office' has an element of cachet, and even mystique, because it is usually associated with the mega-wealthy. However, practically speaking, virtually any family that manages its investments—independent of the size of the investment pool—could be considered a family office. The difference is mainly semantic.

DIY Financial Advisor outlines a step-by-step process through which investors can take control of their hard-earned wealth and manage their own family office. Our research indicates that what matters in investing are minimizing psychology traps and managing fees and taxes. These simple concepts apply to all families, not just the ultra-wealthy.

But can—or should—we be managing our own wealth?

Our natural inclination is to succumb to the challenge of portfolio management and let an 'expert' deal with the problem. For a variety of reasons we discuss in this book, we should resist the gut reaction to hire experts. We suggest that investors maintain direct control, or at least a thorough understanding, of how their hard-earned wealth is managed. Our book is meant to be an educational journey that slowly builds confidence in one's own ability to manage a portfolio. We end our book with a potential solution that could be applicable to a wide-variety of investors, from the ultra-high net worth to middle class individuals, all of whom are focused on similar goals of preserving and growing their capital over time.

DIY Financial Advisor is a unique resource. This book is the only comprehensive guide to implementing simple quantitative models that can beat the experts. And it comes at the perfect time, as the investment industry is undergoing a significant shift due in part to the use of automated investment strategies that do not require a financial advisor's involvement. DIY Financial Advisor is an essential text that guides you in making your money work for you—not for someone else!

Preface xi

Acknowledgments xiii

Part One Why You Can Beat the Experts 1

Chapter 1 Are Experts Trying Too Hard? 3

Why Do We Rely on Experts? 6

What Are the Experts’ Incentives? 9

Are Experts Worthless? 11

The Expert’s Hypothesis 13

Summary 14

Notes 15

Chapter 2 Simple Models Typically Beat the Experts 17

The Evidence Shows… 20

A Study of All the Studies 21

What if Experts Have the Model? 23

But Investing Is Different, Right? 24

Why Experts Fail to Beat Models 26

Summary 28

Notes 29

Chapter 3 Experts Are Biased and Overconfident 31

The Biased Brain 33

Summary 47

Notes 48

Chapter 4 Experts Tell Us Stories, Not Facts 49

Story-Based Investing 52

Evidence-Based Investing 53

The Recap: Why Experts Fail 60

Why Not Use Models? 62

Summary 63

Notes 64

Part Two How You Can Beat the Experts 67

Chapter 5 A Framework for Investment Decisions 69

Assessing an Advisor Is Difficult 71

The FACTS Framework 75

We’ve Got the FACTS: Now What? 86

Summary 90

Notes 90

Chapter 6 A Simple Asset Allocation Model That Works 91

Asset Allocation 95

A Simple Asset Allocation Model That Works 98

But Which Assets Do We Choose? 103

Summary 104

Notes 105

Chapter 7 A Simple Risk Management Model That Works 107

A Simple Risk Management Model That Works 109

How Does ROBUST Work? 113

Summary 121

Risk Management Research (For Geeks Only) 121

Notes 129

Chapter 8 Simple Security Selection Models That Work 133

Value Investing 134

Momentum Investing 140

A Simple Momentum Model That Works 146

Combining Value and Momentum 148

International Stocks 151

Get ‘Er Done 153

Summary 154

Notes 154

Chapter 9 The Do-It-Yourself (DIY) Solution 157

Exploring a Simple Equal-Weight Five Asset Class Model 159

Enhancing the Ivy 5 Concept 163

Finish Strong: The Ultimate DIY Solution 171

Get ‘Er Done 175

Notes 176

Chapter 10 Some Practical Advice 179

Three Reasons We Will Not Be a DIY Investor 180

Three Reasons You Might Fail 183

But Don’t Lose Hope! 185

Is DIY the Only Solution? 186

Notes 187

Appendix: Analysis Legend 189

About the Companion Website 191

About the Authors 193

Index 195

WESLEY R. GRAY, PHD, is the founder of Alpha Architect, LLC, where he is the executive managing member. Dr. Gray is the co-author of Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors.

JACK R. VOGEL, PHD, is a managing member of Alpha Architect, LLC, where he heads the research department, writes papers on empirical asset pricing, and serves as the Chief Financial Officer.

DAVID P. FOULKE is a managing member of Alpha Architect, LLC. He assists in business development, firm operations, strategic initiatives, and developing papers on quantitative investing and behavioral finance topics.

DIY Financial Advisor gives individual investors the information and tools they need to take control of their hard-earned money and manage their own wealth—no matter how much or how little they have. The key advantage any individual investor has over so-called “institutional” investors is the ability to make long-term investment decisions that maximize after-tax, after-fee, and risk-adjusted performance, without fear of a misalignment of incentives. Those who own the money are the best stewards of the money.

In this essential resource, Wesley R. Gray, Jack R. Vogel, and David P. Foulke show what it takes to stop relying on so-called experts and become a savvy investor. The authors outline an investment strategy that reduces fees, banishes psychological fears and traps, and shows how to minimize taxes by limiting trading activity, engaging in smart planning, and by following some simple rules.

DIY Financial Advisor empowers investors to maintain direct control of their portfolios and shows how to implement simple quantitative models that can beat the experts. In easy-to-understand terms, they explain the vital importance of sticking to the FACTS (fees, access, complexity, taxes, and search). This proven framework outlines straightforward concepts that apply to everyone, from the middle-class to the mega-rich.

DIY Financial Advisor is as timely as it is informative. The investment industry is undergoing a significant shift due in part to the use of automated investment strategies that do not require a financial advisor’s involvement. Let DIY Financial Advisor be your hands-on guide for making your money work for you—not for someone else!