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DIY Financial Advisor: A Simple Solution to Build and Protect Your Wealth
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!
224 pages, Hardcover
First published July 27, 2015
44 people are currently reading
246 people want to read
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Displaying 1 - 12 of 12 reviews
August 21, 2018
Trying to elbow oneself into the latest unicorn- celebration in Silicon Valley is a mean feat. But it pales in comparison to the task at hand for the authors of DYI Financial Advisor – achieving tenure in the Advice For The Individual Investor-section of the bookstore. However, we believe this book is a credible attempt. The aim of the book is certainly noble: to equip the private investor with the knowledge and confidence needed to say no to little helpers, high fees and underperforming assets and implement a more efficient solution. Every man his own asset allocator.
Along the same path the three authors’ day-job at Alpha Architect also revolves around the vision “to empower the investor through education”. And rarely have there been more well-armed authors to take on the subject. All three of them, led by Wesley Gray (author of Quantitative Value), have an ocean of academic and practioner’s experience. There is of course always the risk of singing the praise of one’s own commercial solution in a case like this and the authors from time to time play close to the sidelines, but without that there can be no “practical experience”.
So, what is the gist of the arguments behind the claim that each individual can be his/her own investor? Stick to FACTS: How should a portfolio be constructed after controlling for Fees, Access, Complexity, Taxes and Search. Underlying the acronym the most important part is simplicity. Again and again, the 60/40-model of 60% equities and 40% bonds has proven almost impossible to beat over time. If you then add “proven, evidence-based layers of alpha” such as value, size and momentum, you stand a very good chance to beat the experts. Irrespective of what your beliefs are when it comes to the ability to translate these layers of alpha from theory (studies) to practice (after cost), you will gain lots of insight from these chapters.
The book is practically organized into two parts (please see our interview with Wesley Gray). Part 1 deals with the rationale and evidence in favor of adhering to simple, systematic processes. Mr. Gray
has on several occasions pointed out the similarities between his years in the military and a stringent investment process. You need the system in place before you approach the task at hand. As the saying goes: “Sweat in peace so you don’t bleed in war”. Apart from some minor irritations around why models are superior to human judgements (ETFs are rules-based models. Does that make them inherently more rational?), these chapters give a useful rundown on why rules-based thinking is preferred.
Part 2 then goes on to outline the steps for how individual investors, of all sizes, can beat the experts. To that point the authors opines: “The key advantage...any individual investors, has over so called ‘institutional investors’, is the ability to make long-term investment decisions that maximize after-tax, after-fee risk- adjusted performance, without fear of a misalignment of incentives”. I for one believe this freedom from constant surveillance from a myriad of marketplace-actors to far outweigh the potential drawbacks. Each chapter is summarized in a couple of neat paragraphs, a method I find more and more useful. It serves the purpose of needed repetition but also helps to “compare notes” with what the author believe to be the key messages of each chapter. On a more technical note, the fact that all references, sources and notes are put directly after the chapter instead of in a long list at the end means a much higher degree of follow-up and an interaction from the reader.
Funnily enough, people seem more likely to follow the DIY-path when it comes to house-building than investing. The last chapter discusses why an implementation of a do-it-yourself-solution is actually unlikely. This chapter alone is worth more than the $15 cost of the book, merely by touching on crucial psychological barriers. However, there is little foolproof advice that covers everything. The authors themselves are experts, a group of people “to generally avoid”. Also, faced with difficult issues, there is a question they often ask: “What would Charlie Munger do?” Touché.
Along the same path the three authors’ day-job at Alpha Architect also revolves around the vision “to empower the investor through education”. And rarely have there been more well-armed authors to take on the subject. All three of them, led by Wesley Gray (author of Quantitative Value), have an ocean of academic and practioner’s experience. There is of course always the risk of singing the praise of one’s own commercial solution in a case like this and the authors from time to time play close to the sidelines, but without that there can be no “practical experience”.
So, what is the gist of the arguments behind the claim that each individual can be his/her own investor? Stick to FACTS: How should a portfolio be constructed after controlling for Fees, Access, Complexity, Taxes and Search. Underlying the acronym the most important part is simplicity. Again and again, the 60/40-model of 60% equities and 40% bonds has proven almost impossible to beat over time. If you then add “proven, evidence-based layers of alpha” such as value, size and momentum, you stand a very good chance to beat the experts. Irrespective of what your beliefs are when it comes to the ability to translate these layers of alpha from theory (studies) to practice (after cost), you will gain lots of insight from these chapters.
The book is practically organized into two parts (please see our interview with Wesley Gray). Part 1 deals with the rationale and evidence in favor of adhering to simple, systematic processes. Mr. Gray
has on several occasions pointed out the similarities between his years in the military and a stringent investment process. You need the system in place before you approach the task at hand. As the saying goes: “Sweat in peace so you don’t bleed in war”. Apart from some minor irritations around why models are superior to human judgements (ETFs are rules-based models. Does that make them inherently more rational?), these chapters give a useful rundown on why rules-based thinking is preferred.
Part 2 then goes on to outline the steps for how individual investors, of all sizes, can beat the experts. To that point the authors opines: “The key advantage...any individual investors, has over so called ‘institutional investors’, is the ability to make long-term investment decisions that maximize after-tax, after-fee risk- adjusted performance, without fear of a misalignment of incentives”. I for one believe this freedom from constant surveillance from a myriad of marketplace-actors to far outweigh the potential drawbacks. Each chapter is summarized in a couple of neat paragraphs, a method I find more and more useful. It serves the purpose of needed repetition but also helps to “compare notes” with what the author believe to be the key messages of each chapter. On a more technical note, the fact that all references, sources and notes are put directly after the chapter instead of in a long list at the end means a much higher degree of follow-up and an interaction from the reader.
Funnily enough, people seem more likely to follow the DIY-path when it comes to house-building than investing. The last chapter discusses why an implementation of a do-it-yourself-solution is actually unlikely. This chapter alone is worth more than the $15 cost of the book, merely by touching on crucial psychological barriers. However, there is little foolproof advice that covers everything. The authors themselves are experts, a group of people “to generally avoid”. Also, faced with difficult issues, there is a question they often ask: “What would Charlie Munger do?” Touché.
March 3, 2018
An interesting book about managing your own investment portfolio, but covers only the accumulation phase and has nothing to say about the distribution phase. The authors present evidence that models perform better than experts and that due to overconfidence and misaligned incentives many investors can do better managing their investments themselves.
Investors need to be mindful of Fees, Access (accessibility and liquidity), Complexity (simple is better), Taxes, and Search (cost of finding and analyzing alternative investments, including managers).
For access do not invest in a Limited Partnership (capital can be locked up in a law suit); go for separately managed accounts (SMAs) or Exchange-Traded Funds.
The best performing Asset Allocation model is a simple equal weight.
Models probably work because of psychological bias and overconfidence of investors, including the experts. This bias makes it difficult for us to distinguish between the role of skill and luck in results.
The authors practice market timing. They recommend two risk management models used together for timing investments:
Simple 12-Month Moving Average (MA)
Buy when the asset price exceeds the average
Time Series Momentum (TSMOM)
TSMOM = 12-month Return of asset – risk free return
risk free return is T-bill yield
Buy when 12 month average excess return is greater than zero
For security selection the authors say value and momentum are the best criteria.
Measure of value: EBIT/TEV
Measure of momentum: Cumulative returns to stocks over the last 12 months ignoring the last month.
Their moderate portfolio:
15% US value, 15% US momentum, 15% international value, 15% international momentum, 10% commodities, 10% real estate, 20% bonds
Personally I prefer a more passive investment strategy as advocated by The Bogleheads' Guide to Investing by Taylor Larimore, Michael LeBoeuf, & Mel Lindauer.
Investors need to be mindful of Fees, Access (accessibility and liquidity), Complexity (simple is better), Taxes, and Search (cost of finding and analyzing alternative investments, including managers).
For access do not invest in a Limited Partnership (capital can be locked up in a law suit); go for separately managed accounts (SMAs) or Exchange-Traded Funds.
The best performing Asset Allocation model is a simple equal weight.
Models probably work because of psychological bias and overconfidence of investors, including the experts. This bias makes it difficult for us to distinguish between the role of skill and luck in results.
The authors practice market timing. They recommend two risk management models used together for timing investments:
Simple 12-Month Moving Average (MA)
Buy when the asset price exceeds the average
Time Series Momentum (TSMOM)
TSMOM = 12-month Return of asset – risk free return
risk free return is T-bill yield
Buy when 12 month average excess return is greater than zero
For security selection the authors say value and momentum are the best criteria.
Measure of value: EBIT/TEV
Measure of momentum: Cumulative returns to stocks over the last 12 months ignoring the last month.
Their moderate portfolio:
15% US value, 15% US momentum, 15% international value, 15% international momentum, 10% commodities, 10% real estate, 20% bonds
Personally I prefer a more passive investment strategy as advocated by The Bogleheads' Guide to Investing by Taylor Larimore, Michael LeBoeuf, & Mel Lindauer.
March 31, 2020
Interesting approach, but the results presented in the book are flawed.
All the calculations are based on plain vanilla data crunch. They admit in the book that the calculations are not taking in consideration the trading commissions, which for some of the approaches can be gianormous. A 10th percentile of the S&P 500 is 50 companies, and the turnover for some of the approaches is monthly. So basically they suggest that when re balancing, we have to do between 50 and 100 deals a month -> definitely not optimal for a DIY home investor, because the commissions will eat up whatever the upside of the strategies are.
Another flaw as some of the other comments suggest is that this is yet another book that back tests data.
And at the end of the book they state that if you are overwhelmed by the amount of work that you need to do each month in order to follow "the strategy", i.e. what they preach, they can sell you their service -> NICE.
All the calculations are based on plain vanilla data crunch. They admit in the book that the calculations are not taking in consideration the trading commissions, which for some of the approaches can be gianormous. A 10th percentile of the S&P 500 is 50 companies, and the turnover for some of the approaches is monthly. So basically they suggest that when re balancing, we have to do between 50 and 100 deals a month -> definitely not optimal for a DIY home investor, because the commissions will eat up whatever the upside of the strategies are.
Another flaw as some of the other comments suggest is that this is yet another book that back tests data.
And at the end of the book they state that if you are overwhelmed by the amount of work that you need to do each month in order to follow "the strategy", i.e. what they preach, they can sell you their service -> NICE.
August 5, 2021
This book lays a foundation for personal finance 101 but it's not practical. Rebalance will chew off most of the returns because of transaction costs and taxes. Overall, it's a simple strategy and some principles are solid but practicality of this is debatable. Beginners can refer to this.
The other two books by Wes are more practical.
The other two books by Wes are more practical.
October 14, 2017
An OK book about the benefits of value and momentum investing within a personal portfolio. They heavily cite "research," but don't acknowledge that most of the research is of low quality and is simply data fitting.
October 25, 2021
Enjoyed this one. They start by showing evidence that relatively simple models can beat the “experts”. They then develop a simple model of a diversified portfolio of concentrated value and momentum strategies, with a trend following overlay for risk management.
June 14, 2018
Complementary
I would say it is a good complementary read if you are into the theory and practice of asset allocation.
I would say it is a good complementary read if you are into the theory and practice of asset allocation.
November 20, 2016
I loved Wes Gray’s book with Tobias Carlyle: Quantitative Value. I have been thinking about becoming a financial advisor and have been fooling around with different asset allocation models. Imagine my surprise and delight when I found out he had another book (with Jack Vogel and David Foulke) combining the three.
The book is a very easy read (especially when you skip over the all the studies/back testing) and the authors do a great job simplifying complex strategies and creating solutions for investors at various skill and risk levels.
Read my notes here: http://rightpriceinvesting.com/2016/1...
The book is a very easy read (especially when you skip over the all the studies/back testing) and the authors do a great job simplifying complex strategies and creating solutions for investors at various skill and risk levels.
Read my notes here: http://rightpriceinvesting.com/2016/1...
October 30, 2015
These guys know their stuff and the data.
They show, as they have done in their previous book that value and momentum are two abnormalities in the market that can be bet on.
They show a investing process that take emotions out of the equation and instead show a process which is based on rules - value and momentum.
The problem with their "simple solution" is that it is very hard for the individual investor to implement.
They show, as they have done in their previous book that value and momentum are two abnormalities in the market that can be bet on.
They show a investing process that take emotions out of the equation and instead show a process which is based on rules - value and momentum.
The problem with their "simple solution" is that it is very hard for the individual investor to implement.
August 3, 2016
Overall the book is well written and laid out for the advanced DIY person with a fairly strong knowledge base in finance. Pats of the book are technical in nature but not overly critical to following through with a DIY financial plan. I will create a sample portfolio based on the suggestions of the book and track it for results. I will be posting the results and a more thorough review of the book on my blog in the near future.
October 22, 2017
MA and MOM are actually entering/risk filtering on noise, and strategies are still too complex (think may be biased), but liked the style and basic ideas.
April 8, 2020
Pretty in-depth on mathematical analysis for casual investor. Will be interesting to see how this approach stands up to testing other than back-testing.
Displaying 1 - 12 of 12 reviews