Tuesday, January 5, 2016

Book review: DIY Financial Advisor

DIY Financial Advisor picks up on and expands the general themes in co-author Wes Gray's excellent 2012 book Quantitative Value . Gray and his latest co-authors, Jack Vogel and David Foulke, try to show individual investors simple methods for managing their entire investment portfolio, not just stocks. That way, they can potentially cut off their financial advisor and 'do it yourself', or at least be informed on what to look for in a capable, honest financial advisor.

The first major part of the book shows why you can do better than the pros. It retreads some famous studies showing how expert decision makers often fail compared to simple rules-based systems in a variety of fields, including investments. It is an indictment of human judgment, especially as exercised by knowledgeable experts. The authors tackle a few myths about relying on experts, such as the myths that complexity and qualitative informative adds value, and they present a number of biases exhibited by everyone, pros and amateurs alike. A lot of this goes into theories and explanations provided by behavioral finance, which always deserves explorations of its own.

The second major part comprises the vast majority of the book. In there, the authors present some simple methodologies that touch the essential elements of investing: asset allocation, risk management and security selection. In each of those aspects, they present simpler techniques that beat most other highly complex methods studied. For instance, naïvely equal-weighting between different asset classes is shown to equal or outperform far more sophisticated models like mean-variance. The authors also favor simple value and momentum criteria for stock selection.

The research is fascinating and my own observations and tests would suggest that simplifying things do seem to make investing easier. Having said that, the final chapter of the book, which presents obstacles why people would be hesitant to applying the suggested models, is probably the least convincing. The reasons presented there are fair enough but there is a much bigger one that trumps them combined: the authors, just like in Quantitative Value, overstate the ease with which this can be applied by most investors. The hardcore individual investors that this book should appeal to will likely find a lot of value here, but the complete solution presented is not all that easy to follow or implement. For the casual investors who picked this up on the basis of the title “DIY Financial Advisor”, thinking that this would truly be something they could do themselves, they are very likely to be lost halfway through the book. Financial advisors exist in part because a lot of people couldn’t be bothered to follow investing even should they have the time, which they don’t often have.

Nonetheless, the research pieces presented, if you have the patience to understand them, are very compelling and, to their immense credit, the authors provide a blueprint for evaluating other investment advisor services. I should also point that a lot of this research is present throughout their website AlphaArchitect.com and they also provide free tools if you do wish to implement their strategies yourself. They also recently launched a series of ETFs, which select stocks either through value criteria or through momentum criteria, that at least make implementing the stock selection aspect much more palatable. As for the book itself, all in all, DIY Financial Advisor is very-well researched, presents some compelling things to reflect upon and is a solid addition to your investing library.

Disclosure: DIY Financial Advisor and Quantitative Value were purchased with my own money. I do not receive any compensation from the authors for this review. If you buy these books through Amazon though my site, I do get a small commission.