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Personal Benchmark: Integrating Behavioral Finance and Investment Management

ISBN: 978-1-118-96332-6
336 pages
October 2014
Personal Benchmark: Integrating Behavioral Finance and Investment Management (1118963326) cover image


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.

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Table of Contents

Preface xi

Introduction 1


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


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


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

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Author Information

CHUCK WIDGER is the Founder and Executive Chairman of Brinker Capital, an investment management 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.

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Press Release

October 17, 2014
New Book Helps Advisors and Investors Put Behavioral Finance Theory into Practice

In Personal Benchmark, Widger and Crosby define ways financial advisors can execute a program of embedded behavioral finance that is fueled by what matters most to their clients, and can protect against irrational investor behavior. The book demonstrates how advisors and investors can improve their investment experience and increase returns formerly sacrificed to emotional, rather than rational, decisions. Their approach reduces investor concerns about “the economy” by shifting their focus to “my economy” by taking a goals-based investment approach.

 The book also aims to help close the behavior gap that exists among investors. According to the 2014 update of the 30-year study by DALBAR, the nation's leading financial services market research firm, the average equity investor underperformed the S&P 500 Index by -7.42 percent annually for the 30-year period ending December 31, 2013. The study reported the average stock market investor’s annualized return for this period was +3.69 percent, compared to +11.11 percent for the S&P 500 Index. According to Widger and Crosby, this behavior gap exists because in periods of volatility, investors tend to sell paper losses at bottoms and pile back in at market tops. This suggests that individual investors feel the pain of loss more than the pleasure of gain. 

 “Dr. Crosby and I wrote Personal Benchmark to enable the conversation between advisors and their clients to change,” said Widger. “Over my 30-plus years in the investment management industry, I have seen the focus shift away from investor goals to relative returns, such as trying to beat industry indices that bear little relevance to their lives. Goals- or outcomes-based approaches are not new ideas, but there is a new consciousness emerging about them. It’s time to return them to common practice, and we believe Personal Benchmark can be an important tool in making that happen.”

 “Our view is that Personal Benchmark is the most hopeful behavioral finance book out there,” said Crosby. “For so long, the behavioral finance conversation has been mired in negativity about all the ways in which investors are hopelessly irrational. We agree that humankind isn't exactly logical all of the time, but we believe that those quirks can be harnessed for investor benefit when the focus turns to personal goals and considers investors’ best interests.”

 “In a business where investment returns and investment benchmarks have been analyzed thoroughly, the subject of personal benchmarks and their construction, suitability, and measurement is in its infancy,” said Robert C. Doll, Chief Equity Strategist and Senior Portfolio Manager at Nuveen Asset Management. “Taking principles from behavioral finance—for example, creating a disciplined approach that reduces the emotional temptation to buy high and sell low that plagues so many—this book makes a great contribution to financial advisors and their clients in seeking to create satisfactory investment experiences."

 “This book is an exciting advance on how behavior research can and should influence investment decision making,” said Carl J. Schramm, University Professor at Syracuse University and former President of the Kauffman Foundation. “Its focus on how the individual investor and their advisor begin with developing a personalized set of economic expectations and managing a portfolio in the context of the investor's own economy is an important and actionable insight."

 "This book is an ode to a commonsense realization—investing is a social science rather than a physical one,” said Jason DeSena Trennert, Managing Partner and Chief Investment Strategist at Strategas Research Partners. “Combining tried and true investment techniques with cutting-edge research on behavioral finance provides a wonderful new approach for those charged with managing other people's money."

 Personal Benchmark is divided into three parts:


  • Part 1, “Why Do We Need to Look at Investing Differently?” examines why we need to look at investing differently. The need emerges from the idea that advisors tend to be optimists (Chapter 1, “Freedom in the Market and Advisor Responsibility”), while investors tend to make financial decisions based on less than informed or rational bases (Chapter 2, “Investor Emotions and Financial Decisions”). Moreover, risk is seen as inherently personal, necessitating a shift in how risk is measured and managed (Chapter 3, “Risk, This Time It’s Personal”).


  • Part 2, “What Is the Personal Benchmark Approach?”, provides an introduction to the Personal Benchmark approach, including an overview of Brinker Capital’s multi-asset class investing philosophy (Chapter 4, “Brinker Capital’s Multi-Asset Class Investment Philosophy”), using the concept of “buckets” to create a segmented approach to investing (Chapter 5, “The Power of Buckets”), and outlining the practices for actively managing investment performance (Chapter 6, “Selection of an Active Investment Manager”).


  • Part 3, “How Can We Execute a Purpose-Driven Investment Strategy?” describes how a purpose-driven investment strategy can be executed. In this part of the book, Widger and Crosby begin with an overview of Brinker Capital’s goals-based approach to planning and monitoring the investment portfolio (Chapter 7, “Using a Goals-Based Approach”) and encouragement and guidelines for pursuing your Personal Benchmark (Chapter 8, “Pursuing Your Personal Benchmark”). The remaining two chapters provide practical tools for the advisor to use, including an easy-to-use explanation of investing according to the Brinker Capital approach and Personal Benchmark (Chapter 9, “Providing an Easy-to-Understand Explanation”), as well as an introduction to the Personal Benchmark solution (Chapter 10, “Leveraging a Scalable Offering for Investors and Advisors”).

 For more information about Personal Benchmark, please visit http://www.personalbenchmarkbook.com.


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