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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!
Contents
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
