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

Readers of Scott’s Investments know I am a proponent of do-it-yourself investing solutions. I am also a big fan of Alpha Architect, so I was excited when I was asked to review a book which combines the best of both worlds, DIY Financial Advisor: A Simple Solution to Build and Protect Your Wealth (DIY).

Authors Wes Gray, Jack Vogel, and David Foulke, all of Alpha Architect, split DIY into two parts.  Part one uses a variety of studies and evidence to argue we, as individual investors,  can beat the experts.  Part two shows us specifically how we can beat the experts by implementing a do-it-yourself investment solution.

Chapter 1 argues model-based decision making yields better results than discretionary decision making.  Model-based decision making involves development, implementation, and assessment. Experts are not completely discredited by the authors, who argue they are critical for certain elements of our decision making. Specifically, experts are necessary to develop and assess decision-making processes, but a central tenant of DIY is that executing decision making should be systematic.

Chapters 2 and 3 argue human behavioral biases can lead to poor decision making.  The authors rely on a body of research that shows humans tend to make story-based, rather than evidence-based decisions.  To make matters worse, our species is consistently overconfident, fueling our poor decisions.

Chapter 4 transitions from a study of broad human behavioral biases to applications of these biases in investing.  The authors argue for evidence-based investing instead of story-based investing. Stories permeate financial markets, but in order to be good investors we should instead follow the evidence.

In Part Two (Chapters 5 – 10) the authors show us how we can beat financial experts. Their argument is guided by a “FACTS” framework. FACTS stands for Fees, Access, Complexity, Taxes, and Search.  The authors argue these principles should always be used when assessing any investment strategy.

Chapter 6 introduces the reader to basic asset allocation strategies.  The cornerstone of asset allocation is diversification, and the authors use some popular  asset allocation models to argue fine-tuning asset allocation strategies does not really matter over long periods.  In addition, they find that equal-weight portfolios meet or beat “fancy” asset allocation strategies.  In other words, a simple, diverse asset allocation strategy is robust.

Chapter 7 discusses risk management models as a means to improve risk-adjusted returns in asset allocation.  The authors argue that simple trend following models are effective risk management strategies.  Specifically, simple moving average systems (such as a 10 month or 12 month moving average) and time-series momentum have been shown to be effective. The conclusion is that a simple 50/50 split between the two systems generate an excellent risk-reward profile.

Chapter 8 highlights the benefits of simple security selection models. The authors argue two factors, value and momentum, are reliable and simple to implement for DIY investors.  They highlight a specific value system that ranks stocks based on EBIT/TEV (earnings before interest and taxes divided by total enterprise value) which has strong historical returns.  They also test a simple momentum system on individual stocks with strong historical returns.  They show that the two systems combined into a 50 percent value and 50 percent momentum portfolio generates even higher returns than either system by itself.

Chapter 9 puts the entire DIY system together. The authors create a system which allocates across asset classes.  Risk management techniques are used to manage drawdowns and volatility. Finally, asset classes are allocated to value and momentum strategies to further enhance performance.

DIY consolidates many of the arguments I have read on Alpha Architect in recent years.  It is well constructed, researched, concise, and accessible for professionals and inexperienced investors. The target audience is both family offices and individual investors and both could benefit from following a DIY solution.  I recommend DIY whether you are new to investing, an experienced office, an Alpha Architect reader or not.

Implementing the value and momentum strategies as detailed in the book (via individual stocks) could be a challenge for individual/small investors. However, the strategies outlined in the book can be replicated via ETFs.  DIY lacks specific ETF recommendations but my site tracks a  “RAA Spreadsheet” using ETFs that is similar in style to the strategies outlined in the book. In the coming days, the sheet will be updated to more closely align with the strategies in DIY. In addition, Alpha Architect also posts the DIY allocation strategy for free.


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