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

260 Pages·2015·2.72 MB·English

by  Wesley R. Gray

Table of Contents
Title Page
Copyright
Dedication
Preface
Acknowledgments
Part One: Why You Can Beat the Experts
Chapter 1: Are Experts Trying Too Hard?
Why Do We Rely on Experts?
What Are the Experts' Incentives?
Are Experts Worthless?
The Expert's Hypothesis
Summary
Notes
Chapter 2: Simple Models Typically Beat the Experts
The Evidence Shows…
A Study of All the Studies
What if Experts Have the Model?
But Investing Is Different, Right?
Why Experts Fail to Beat Models
Summary
Notes
Chapter 3: Experts Are Biased and Overconfident
The Biased Brain
Summary
Notes
Chapter 4: Experts Tell Us Stories, Not Facts
Story-Based Investing
Evidence-Based Investing
The Recap: Why Experts Fail
Why Not Use Models?
Summary
Notes
Part Two: How You Can Beat the Experts
Chapter 5: A Framework for Investment Decisions
Assessing an Advisor Is Difficult
The FACTS Framework
We've Got the FACTS: Now What?
Summary
Notes
Chapter 6: A Simple Asset Allocation Model That Works
Asset Allocation
A Simple Asset Allocation Model That Works
But Which Assets Do We Choose?
Summary
Notes
Chapter 7: A Simple Risk Management Model That Works
A Simple Risk Management Model That Works
How Does ROBUST Work?
Summary
Risk Management Research (For Geeks Only)
Notes
Chapter 8: Simple Security Selection Models That Work
Value Investing
Momentum Investing
A Simple Momentum Model That Works
Combining Value and Momentum
International Stocks
Get ‘Er Done
Summary
Notes
Chapter 9: The Do-It-Yourself (DIY) Solution
Exploring a Simple Equal-Weight Five Asset Class Model
Enhancing the Ivy 5 Concept
Finish Strong: The Ultimate DIY Solution
Get ‘Er Done
Notes
Chapter 10: Some Practical Advice
Three Reasons We Will Not Be a DIY Investor
Three Reasons You Might Fail
But Don't Lose Hope!
Is DIY the Only Solution?
Notes
Appendix : Analysis Legend
About the Companion Website
About the Authors
Index
End User License Agreement
List of Illustrations
Chapter 1: Are Experts Trying Too Hard?
Figure 1.1 Ed Adelson Checkerboard Illusion
Figure 1.2 Ed Adelson Checkerboard Illusion Answer
Figure 1.3 The Decision-Making Process
Chapter 2: Simple Models Typically Beat the Experts
Figure 2.1 Parole Decisions and Recidivism Correlation
Figure 2.2 Models vs. Experts Across 136 Academic Studies (Win %)
Figure 2.3 Hit Rate for Classification Accuracy (%)
Figure 2.4 Cumulative Return May 2009 to April 2011 (%)
Chapter 3: Experts Are Biased and Overconfident
Figure 3.1 Rational and Irrational Behavior
Figure 3.2 Anchoring Example
Figure 3.3 Anchoring Example Results
Figure 3.4 Framing Effect
Figure 3.5 Value of $100 Invested
Figure 3.6 Promoting the Use of Nuclear Power in the US
Figure 3.7 Allowing More Offshore Oil and Gas Drilling
Figure 3.8 Perceived Guilt by Time of Day
Figure 3.9 Overconfidence
Figure 3.10 Nine Levels of Information
Chapter 4: Experts Tell Us Stories, Not Facts
Figure 4.1 Real Equity and Real GDP Per Capita Growth
Figure 4.2 Scatterplot of Payout Ratio vs. Subsequent 10-Year Real
Earnings Growth, 1946–2001 Data
Chapter 6: A Simple Asset Allocation Model That Works
Figure 6.1 Classic Modern Portfolio Theory Chart
Figure 6.2 The IVY 5 Concept
Chapter 7: A Simple Risk Management Model That Works
Figure 7.1 TMOM = Bad; MA = Good
Figure 7.2 TMOM = Good; MA = Bad
Chapter 8: Simple Security Selection Models That Work
Figure 8.1 Past 5-Year Earnings Growth Rates and Prices
Figure 8.2 Future 5-Year Earnings Growth Rates
Figure 8.3 Lifecycle of a Trend
Figure 8.4 Vanguard Stock Style Chart
Chapter 9: The Do-It-Yourself (DIY) Solution
Figure 9.1 Allocation under the Ivy 5 Concept
Figure 9.2 Ivy 5 with a Moving Average Rule
Figure 9.3 Three DIY Concepts
Figure 9.4 DIY Moderate Tilt (Example)
List of Tables
Chapter 3: Experts Are Biased and Overconfident
Table 3.1 Ten Question Overconfidence Test
Chapter 4: Experts Tell Us Stories, Not Facts
Table 4.1 Performance of Dallas Cowboy Victory Signal (2000 to 2013)
Table 4.2 Performances of the Three Strategies
Chapter 5: A Framework for Investment Decisions
Table 5.1 MainStay S&P 500 Index Fund Performance as of December
5, 2014
Table 5.2 Fund Fees over Time (1980 to 2006)
Table 5.3 Hedge Fund Fees over Time (1996 to 2007)
Table 5.4 Hedge Fund Lockup Periods
Table 5.5 Tax Rate Increases from 2012 to 2013
Chapter 6: A Simple Asset Allocation Model That Works
Table 6.1 Summary Statistics
Table 6.2 Tangency and Minimum Variance Portfolio Weights
Table 6.3 Equal-Weight, Tangency, and Minimum-Variance
Performance
Table 6.4 Summary Statistics of Three Strategies
Table 6.5 Asset Allocation Models Tested
Table 6.6 Datasets Considered
Table 6.7 Asset Allocation Models Empirical Results—Sharpe Ratios
Chapter 7: A Simple Risk Management Model That Works
Table 7.1 Example Simple Moving Average Calculation
Table 7.2 Example Time Series Momentum Calculation
Table 7.3 Summary Statistics for IVY 5 (1/1976–12/2014)
Table 7.4 Time Series Momentum (TMOM) Performance (1/1976–
12/2014)
Table 7.5 Moving Average (MA) Performance (1/1976–12/2014)
Table 7.6 MOM VS. MA Performance Comparisons (1/1976–12/2014)
Table 7.7 ROBUST Performance (1/1976–12/2014)
Table 7.8 ROBUST Performance Comparisons (1/1976–12/2014)
Table 7.10 NKY Performance Across Systems (1/1971 to 12/2014)
Table 7.11 DAX Performance Across Systems (1/1961 to 12/2014)
Chapter 8: Simple Security Selection Models That Work
Table 8.1 Value and Growth Stocks Summary Statistics
Table 8.2 Valuation Horserace (7/1963–12/2014)
Table 8.3 Long-Term Valuation Horserace
Table 8.4 High and Low Momentum
Table 8.5 Simple Momentum Example
Table 8.6 Equal Weighted Returns across Varying Hold Periods
Table 8.7 Simple Value and Momentum Annual Results
Table 8.8 Simple Value and Momentum Annual Returns
Table 8.9 Simple Value and Momentum Annual Results
Chapter 9: The Do-It-Yourself (DIY) Solution
Table 9.1 Benchmark Summary Statistics
Table 9.2 Strategy Summary Statistics
Table 9.3 Domestic Equity Summary Statistics (1/1992–12/2014)
Table 9.4 International Equity Summary Statistics (1/1992–12/2014)
Table 9.5 Real Assets and Bonds Summary Statistics (1/1992–12/2014)
Table 9.6 Strategy Summary Statistics (1/1992–12/2014)
Table 9.7 Strategy Summary Statistics (1/1992–12/2014)
Table 9.8 Strategy Summary Statistics (1/1976–12/1991)
Table 9.9 Strategy Summary Statistics (1/1927–12/2014)
Table 9.10 Strategy Summary Statistics (1/1992–12/2014)
Table 9.11 Strategy Summary Statistics (1/1992–12/2014)
Table 9.12 Suggested Vehicles to Deploy DIY
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DIY Financial Advisor
A Simple Solution to Build and Protect Your
Wealth
WESLEY R. GRAY, PhD,
JACK R. VOGEL, PhD,
DAVID P. FOULKE