3GFFIRS 08/29/2014 8:21:51 Page ii 3GFFIRS 08/29/2014 8:21:51 Page i PERSONAL BENCHMARK 3GFFIRS 08/29/2014 8:21:51 Page ii 3GFFIRS 08/29/2014 8:21:51 Page iii PERSONAL BENCHMARK Integrating Behavioral Finance and Investment Management Chuck Widger Dr. Daniel Crosby 3GFFIRS 08/29/2014 8:21:52 Page iv Cover design: Wiley Copyright  2014 by Chuck Widger and Dr. Daniel Crosby. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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ISBN 978-1-118-96332-6 (hardcover); ISBN 978-1-118-96339-5 (ePDF); ISBN 978-1-118-96333-3 (ePub) 1. Investment advisors. 2. Investment advisor-client relationships. 3. Finance–Psychological aspects. 4. Portfolio management–Psychological aspects. I. Crosby, Daniel, 1979- II. Title. HG4621.W46 2014 332.6019–dc23 2014020577 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ´ 3GFFIRS 08/29/2014 8:21:52 Page v This book is dedicated to America’s advisors. Professionals who help investors achieve their goals. 3GFFIRS 08/29/2014 8:21:52 Page vi 3GFTOC 08/29/2014 15:1:13 Page vii Contents 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 vii 3GFTOC 08/29/2014 15:1:13 Page viii viii C o n t e n t s 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