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Personal Benchmark: Integrating Behavioral Finance and Investment Management


Praise for Personal Benchmark

"This book is an exciting advance on how behavior research can and should influence investment decision making. 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. I strongly recommend this book, not just for individual investors, but especially for those who provide investment advice to individuals."
—Carl J. Schramm, University Professor, Syracuse University; former President, Kauffman Foundation; serial entrepreneur and venture investor

"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. 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."
—Robert C. Doll, CFA, Chief Equity Strategist, Senior Portfolio Manager, Nuveen Asset Management, LLC

"This book is an ode to a commonsense realization—investing is a social science rather than a physical one. 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."
—Jason DeSena Trennert, Managing Partner, Chief Investment Strategist, Strategas Research Partners LLC

"Investment management and behavioral finance are both critical to achieving the objectives of every investor, but integrating these two concepts—which often seem diametrically opposed—has proven difficult. In Personal Benchmark: Integrating Behavioral Finance and Investment Management, Chuck Widger and Dr. Daniel Crosby have found the touchstone by fashioning elegant investment solutions for the mental accounts or 'buckets' that come so naturally to investors."
—Gregory Curtis, Chairman, Greycourt & Co., Inc.; author of The Stewardship of Wealth; developer of the Moneybags mobile financial application

"For too many years, investors have measured their performance against standard benchmarks such as the S&P 500 Index or the Dow Jones Index. But as Chuck Widger and Dr. Daniel Crosby meticulously demonstrate, beating an index and meeting one's financial goals are not the same thing. In fact, striving to beat an index or a universal benchmark may lead to investment decisions that fail to meet those goals. Instead, Widger and Crosby offer another path, tailored to the unique needs of each investor. Astutely recognizing that long-term financial health has little to do with beating the stock market or the average bond index, Widger and Crosby chart a new course, based on rigorous analysis but grounded in common sense."
—Zachary Karabell, Head of Global Strategy, Envestnet, Inc.

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 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


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