Be The Benchmark

Dr. Daniel Crosby, President, IncBlot Behavioral Finance

If you’re like so many Americans, you probably made a list of your goals for 2014 back in January on New Year’s Eve. Whatever form those resolutions took; whether the goals were physical, financial, or relational, they likely had two foundational elements: they were specific to you and they were aspirational.

More than half way into the year, you may or may not still be on track to meet your goals. But regardless of your current progress, they will stand as personal reminders of the person you could be if you are willing to do the necessary work. As silly as it may sound, let’s imagine goals that violate the two assumptions we mentioned above.

Can you conceive of measuring your success relative to a goal that had nothing to do with your particular needs? What about setting a goal based on being average rather than exceptional? It defies logic, yet millions of us have taken just such a strategy when planning our financial futures!

There is a long-standing tradition of comparing individual investment performance against a benchmark, typically a broad market index like the S&P 500. Under this model, investment performance is evaluated relative to the benchmark, basically, the performance of the market as a whole.

Let’s reapply this widely accepted logic to our other resolutions and see how it stands up. The CDC reports that the average man over 20 years of age is 5’9 and weighs 195 pounds. If we were to use this benchmark as a goal-setting index, the same way that we do financial benchmarks, the average American male would do well to lose a few pounds this year to achieve a healthier body mass index (BMI). Should we then dictate that all American males should lose ten pounds in 2013? Of course not!

The physical benchmark that we used is disconnected from the personal health needs of those setting the goals. Some of us need to lose well more than ten pounds, others needn’t lose any weight and some lucky souls actually have trouble keeping weight on (I’ve never been thusly afflicted).

A second problem is that affixing your goals to a benchmark tends not to be aspirational. The goals we set should represent a tension between the people we are today and the people we hope to become. When we use an average like the benchmark for setting our financial goals, we are settling in a very real sense. No one sets out to live an average life. We don’t dream of average happiness, average fulfillment or an average marriage, so why should we settle for an average investment?

The bulk of my current work is around addressing the irrationality of using everyone else as your financial North Star. Through a deep understanding of your personal needs, your advisor should be able to create a benchmark that is meaningful to you and your specific financial needs. After all, you have not gotten to where you are today by being average. Isn’t it time your portfolio reflected that?

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of IncBlot Behavioral Finance, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor

Investment Insights Podcast – April 30, 2014

Bill Miller, Chief Investment Officer

On this week’s podcast (recorded April 25, 2014):

The sentiments below were inspired by Dalbar’s 20th annual investor behavior analysis. You can read a summary of the study here, via ThinkAdvisor.

What we don’t like: Investors have underperformed the markets, often due to fear and poor timing

What we like: Potential market correction during the summer; important for investors to heed the advice of their advisors and stick to investment objectives

What we are doing about it: Focus on the positives like energy renaissance, manufacturing renaissance, and goals-based solutions

Click the play icon below to launch the audio recording.

Source: Dalbar, ThinkAdvisor

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

How Behavioral Finance Can Help You Set and Keep Financial Goals

Dr. Daniel Crosby, President, IncBlot Behavioral Finance

If you’re ever having trouble sleeping, spend some time researching financial goal setting online and you’re sure to be snoozing in no time. It’s not that the advice you’ll find is bad per se, it’s just that it is fundamentally disconnected from an understanding of how people behave. Most resources will give you some great meat-and-potatoes stuff about setting specific, attainable and timely goals. You will nod your head, go home, and forget all about it, doing what you’ve always done before.

If financial goal setting is to be truly successful, it must account for the way in which people behave, including the really stupid stuff we all do from time to time. What’s more, it must be infused with elements that make it motivational, because let’s face it, you’d probably rather get a root canal than lay out a spreadsheet with some dry figures about your savings goals. To help in this important step, we’ve mixed some best practices in financial planning with some truths about human nature that will add a little, dare we say it, excitement into your financial planning process. After all, your financial goals are only as good as your resolve to adhere to them is strong.

The next time you go to set a financial goal, consider the following:

Plan for the Worst – Cook College performed a study in which people were asked to rate the likelihood that a number of positive events (e.g., win the lottery, marry for life) and negative events (e.g., die of cancer, get divorced) would impact their lives. What they found was that participants overestimated the likelihood of positive events by 15% and underestimated the probability of negative events by 20%.

What this tells us is that we tend to personalize the positive and delegate the dangerous. We think, “I might win the lottery, she might die of cancer. We might live happily ever after, they might get divorced.” We understand that bad things happen, but in service of living a happy life, we tend to think about those things in the abstract. A solid financial plan cannot assume that everything will be wine and roses as far as the eye can see.

Picture Yourself at 90 – One of the reasons that we tend to under prepare for the future is that we value comfort now more than we do in the future. Simply put, the further out an event is, the less valuable we esteem it to be. Let’s say I offered you $100 today or $110 tomorrow. Odds are, you’d use a little bit of self-restraint and go for the extra ten dollars. What if I changed my offer to $100 today or $110 in a month? If you are like most people, you’d take the $100 today rather than wait the extra 30 days. The official term for this devaluation over time is “hyperbolic discounting” and it can have disastrous consequences for managing wealth over a lifetime.

After all, if today’s needs and today’s dollars always perceived as more valuable than tomorrow’s wealth and wants, we’ll make hay while the sun shines. While this can be fun in the moment, your older self is not going to be too happy eating Top Ramen every night. One of the ways to decrease our tendency toward hyperbolic discounting is to make the future more vivid. Researchers at New York University did this by using a computer simulation to age peoples’ faces and found that “manipulating exposure to visual representations of one’s future self leads to lower discounting of future rewards and higher contributions to saving accounts.” Basically, if you can picture yourself wrinkly, you’re more likely to save. Making your own future vivid might include having conversations about your future with your partner, speaking with aging relatives or simply introspecting about your financial future.

Bake In Motivation – Daniel Pink’s seminal work, “Drive” is a concise treatise on what he believes are the three pillars of human motivation – mastery, autonomy and purpose. By including each of these three pillars in the financial goal setting process, you “bake in” motivation, thereby increasing the likelihood of meeting those aspirations. Mastery is all about fluency with the language of finance. While you may never be Warren Buffett, achieving mastery is the first step toward staying motivated. We procrastinate what we don’t like or don’t understand. Once you are facile in the language of numbers, you’ll stop putting your finances on the back burner.

The word “autonomy” is derived from the Greek word “autonomia”, the literal translation of which is “one who gives oneself their own law.” Being autonomous does not mean going it alone. What it does mean is having enough of an understanding of financial best practices that you can select financial professionals whose goals and approaches mimic your own. Finally, and most importantly, is purpose. One of the biggest culprits in bad financial planning is disconnecting the process from the things that matter most to the person making the decisions. Coco Chanel said it best when she said, “The best things in life are free; the second best are very expensive.” Financial solvency facilitates all manner of good, from charitable giving to family vacations to funding an education. If your financial goals are intimately connected to things that matter most to you, saving will cease to be a chore and begin to be a joy.

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of IncBlot Behavioral Finance, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor

The Power of Purpose: The Benefits of Goals-Based Investing

Dr. Daniel Crosby, President, IncBlot Behavioral Finance

I recently had the opportunity to speak about how investor behavior is a driver of the future of the financial services industry and the impact that it has when working with clients at the 2014 FSI OneVoice conference in Washington, D.C.

Much of behavioral finance’s departure from traditional financial models centers on the respective approaches’ vision of what constitutes “rational” behavior. Traditional approaches take a simple, objective approach—rational behavior is all about optimizing returns. Through a behavioral lens, rationality takes on a more subjective view and could be construed as making decisions consistent with personal financial goals. The behavioral approach is constructivist, in that the client sets the parameters for rationality through the articulation of personal goals. But by drawing out the financial goals of their clients, advisors do more than simply highlight a finish line; they actually catalyze a positive behavioral chain reaction.

Consider the followings ways in which having deeper conversations about client goals might make your job easier and improve your clients’ behavior:

Purpose increases influence – The reasons why successful advisors are highly compensated and most trainees burn out within a few years are one in the same–selling is difficult. All too often, advisors are selling the wrong thing, focusing on the “What?” instead of the “Why?” In his excellent TED talk, Simon Sinek suggests that most uninspired business transactions deal with the particulars of a product or service rather than the underlying motivation. Rather than providing your clients with a laundry list of your services, help them understand how your efforts will help them reach their “why.” As Sinek says, “People don’t buy what you do, they buy why you do it.”

Meaning brings clarity – One of the reasons why people fail to save in the now is that it is construed as a loss. In an environment where expensive trinkets can tempt us with each click of the mouse, it can be difficult to put off for a rainy day what could provide more immediate pleasure. Once again, a goals-based approach can help. We know we need to save for some distant date, but the picture we have of the future tends to lack color, which can making saving a burden. By articulating a series of future meaningful goals, advisors can ensure that their clients have this larger “yes” burning inside.

Goals provide comfort in hard times – Viktor Frankl, the Austrian psychiatrist and Holocaust survivor, has written beautifully about the power of purpose in his classic, “Man’s Search for Meaning.” Frankl noticed early on that much of what differentiated hope from a failure to thrive among prisoners was a connection to something bigger than the here and now. For those rooted in the horror of the present, it was exceedingly easy to find reasons to despair. But for those able to look forward to something more, their pain was couched in terms of aiding their long-term goals, which provided them some succor.

While I am in no way trying to draw a straight line between Frankl’s experience and that of a worried investor in a time of market panic, the truth remains that focusing on purpose has a calming effect. Rather than being swept up in the pain of the moment, goals-based investors are better able to understand that they are enduring a momentary discomfort on the path to achieving the things that matter most to them. Are your clients sufficiently tuned in to their personal North Star to aid them when times get rough?

If behavioral finance has taught us anything, I hope it is that true wealth is more about a life well lived than achieving a particular rate of return. In a single act, advisors can improve relationships with their clients, get them excited about the investment process and provide them with a buffer against hard times. Why not?

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of IncBlot Behavioral Finance, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor

Everyone’s Unique

Jeff Raupp, CFA, Senior Investment Manager

Whenever I go to the bowling alley it strikes me how unique people are. And no, it’s not because of the multi-colored shoes or even the matching team jackets complete with catchy names like “Pin Pals” or “Medina Sod” sewn on the back. It’s because of the bowling balls.

Every time I head to the lanes, I can bank on spending at least ten minutes trying to find a ball that works for me. You have the heavy balls with the tiny finger holes and the huge thumb, the balls with the finger holes on the other side of the ball away from the thumb, and the ones where it seems like someone was playing around and drilled three random holes. Half of the time I find myself weighing the embarrassment of using a purple or pink ball that feels okay versus a more masculine black or red ball that weighs a ton but can only fit my pinkie. I’m always left thinking, “Where’s the guy or gal that this ball actually fits?”

But at the end of the day, I find that if I find the right ball, where my hand feels comfortable and the weight is just right, I have a much better game.

In the same way, how to best save toward your life goals is unique to each investor. Even in the scenario where two investors have the same age, same investable assets and generally the same goals, the portfolio that helps them achieve those goals may be decidedly different between them. Investor emotion can play a huge role in the success or failure of an investment plan, and keeping those emotions in check is vital. There is nothing more damaging to the potential for an investor to meet their goals than an emotional decision to deviate from their long-term strategy due to market conditions.

Fortunately, there’s often more than one way to reach a particular goal. There are strategies that focus on total return versus ones that focus on generating income. Strategies that are more market oriented versus those that look to produce a certain level of return regardless of the markets. And there are tactical strategies and strategic strategies. For any investor’s personal goal(s), several of these, or a combination of these, might provide the necessary investment returns to get you there.

Here’s where the emotions can come into play—if you don’t feel comfortable along the way, your emotions can take over the driver’s wheel, and your investor returns can fall short of your goal. In 2008-2009, many investors panicked, fled the markets, and decided to go to cash near the market bottom; but they missed much of the huge market rebound that followed. While in many cases the investors pre-recession strategy was sound and ultimately would have worked to reach their goals, their irrational decision during a period of volatility made it a tougher road.

Unfortunately, you don’t have the benefit of rolling a few gutter balls while you’re trying to find the right portfolio. That’s why working with an expert to find an investment strategy that can get you to your goals, and that matches your personality and risk profile, is vital to success.

Good bowlers show up at the alley with their own fitted ball and rightly-sized shoes. Good investors put their assets in a strategy fitted to their goals.