Personal Benchmark Integrating Behavioral Finance and Investment Management

In Personal Benchmark: Integrating Behavioral Finance and Investment Management, Chuck Widger and Dr. Daniel Crosby outline the ways in which a program of embedded behavioral finance, fueled by what matters most to you, can be your protection against irrational financial behavior. Along the way, you'll learn how to improve your investment experience, increase returns formerly sacrificed to misbehavior, and worry less about "The Economy" as you become increasingly focused on "My Economy."

Welcome to a new way of investing, a new paradigm for conceptualizing wealth, and a system of turning emotion from your portfolio's worst enemy into its best friend!

In this new model, risk is simply the likelihood that we will underperform our dreams. Irrationality is acting in ways that thwart our ability to reach those dreams. And the optimal portfolio is not the one that generates the highest return in abstraction, it is the one that helps us meet our goals without killing our nerves before we get there.

This book gives advisors the tools needed to effectively communicate the design and execution of the Personal Benchmark solution.

CHUCK WIDGER is the Founder and Executive Chairman of Brinker Capital, an investment managment firm with $17 billion in assets under management. Chuck is currently Chair of the Villanova University School of Law Board of Consultors. Chuck is a past Chair of the Gettysburg College Board of Trustees and is chair-emeritus of the Money Management Institute's Board of Governors. The Money Management Institute is the industry association for the $3.5 trillion managed solutions industry. He served as a Lieutenant in the U.S. Navy.

DR. DANIEL CROSBY is a psychologist and behavioral finance expert who helps organizations understand the intersection of mind and markets. Dr. Crosby constructed the "Irrationality Index," a sentiment measure that gauges greed and fear in the marketplace from month to month. His ideas have appeared in print and online, and Daniel was named one of the "12 Thinkers to Watch" by Monster.com and a "Financial Blogger You Should Be Reading" by AARP. Dr. Crosby's well-reviewed first book, You're Not That Great (2012), applies elements of behavioral finance to the pursuit of a meaningful life.

Preface xi

Introduction 1

PART 1 WHY DO WE NEED TO LOOK AT INVESTING DIFFERENTLY? 7

Chapter 1 Freedom in the Market and Advisor Responsibility 9
Chuck Widger

The Financial Markets 10

What We’ve Been Up to as Advisors 15

What Investors Really Want and Need 18

A New Investment Advice Delivery System 26

Brinker Capital and Personal Benchmark 29

Summary 45

References 46

Chapter 2 Investor Emotions and Financial Decisions 49
Dr. Daniel Crosby

The Origins and Evolution of Behavioral Finance 50

The Myths of Efficiency and Rationality 52

A Definition and Framework for Behavioral Finance 57

Summary 77

References 79

Chapter 3 Risk, This Time It's Personal 83
Dr. Daniel Crosby

Fallacy 1: Risk and Return Are Systematically Correlated 85

Fallacy 2: Investors Have a Single, Static Level of Risk Tolerance 90

Fallacy 3: One Man’s Risk Is Another Man’s Reasonable Probability 96

Behavioral Risk and You 102

Summary 104

References 105

PART 2 WHAT IS THE PERSONAL BENCHMARK APPROACH? 107

Chapter 4 Brinker Capital's Multi-Asset Class Investment Philosophy 109
Chuck Widger

A Brief History of Investing 110

Our Multi-Asset Class Investment Philosophy 119

Applying Our Philosophy 122

Implementing Our Philosophy 137

Summary 151

References 152

Chapter 5 The Power of Buckets 153
Dr. Daniel Crosby

Intentional Framing 158

Framing with Purpose 160

Mental Accounting for Increased Rationality 161

Goals-Based Mental Accounts: A Case Study 164

Summary 166

References 166

Chapter 6 Selection of an Active Investment Manager 169
Chuck Widger

Passive versus Active Management 170

The Successful Investment Firm 172

The Successful Investment Manager 175

An Effective Investment Management Process 176

Monitoring and Assessing Performance 179

Summary 187

References 187

PART 3 HOW CAN WE EXECUTE A PURPOSE-DRIVEN INVESTMENT STRATEGY? 189

Chapter 7 Using a Goals-Based Approach 191
Dr. Daniel Crosby

The Allure of Determinism in Economics and Psychology 193

The Economy of One 200

Our Inner Demons: A Field Guide 202

Let Your “Why” Teach You “How” 209

Summary 211

References 212

Chapter 8 Pursuing Your Personal Benchmark 215
Dr. Daniel Crosby

The Difference a Frame Makes 217

Limitations in Our Decision Making 219

The Joneses, Jealousy, and Missteps 221

The Anatomy of Better Decisions 226

Summary 235

References 235

Chapter 9 Providing an Easy-to-Understand Explanation 237
Chuck Widger

Your Best Investment 238

Once More, with Feeling 240

Changing the Conversation 247

The Brinker Capital Personal Benchmark Solution 251

Summary 258

References 258

Chapter 10 Leveraging a Scalable Offering for Investors and Advisors 259
Chuck Widger

Using Personal Benchmark 259

Reaping Benefits for Advisors 280

Summary 282

Conclusion 283

The Centrality of Purpose 288

Finding Meaning in the Mundane 292

References 293

About the Authors 295

About the Companion Website 297

Index 299

The New copy of this book will include any supplemental materials advertised. Please check the title of the book to determine if it should include any access cards, study guides, lab manuals, CDs, etc.

The Used, Rental and eBook copies of this book are not guaranteed to include any supplemental materials. Typically, only the book itself is included. This is true even if the title states it includes any access cards, study guides, lab manuals, CDs, etc.