Book Review: The Behavioral Portfolio

The Behavioral Portfolio: Managing Portfolios and Investor Behavior in a Complex Economy. 2025. Phillip Toews. Harriman House.

In The Behavioral Portfolio, author Phillip Toews — the lead portfolio manager of the Toews Funds and the Agility Shares exchange-traded funds, as well as the co-founder of the Behavioral Investing Institute — seeks to reconcile two largely unacknowledged problems in the investment advisory industry. First, the history and risks of both bond and stock portfolios far exceed what most investors and advisory practices can tolerate. For example, the United States experienced a 36-year bond bear market from 1945 to 1981 and a 14-year stock bear market around the time of the Great Depression. Second, the approach that most financial advisors take to communicate about portfolios is ineffective in helping clients avoid known biases and poor decision making.

In addressing the first problem, the author instructs financial advisors to create robust “behavioral portfolios” designed to invest optimistically while addressing the real-world contingencies of investing in a high-debt world and the many downside risks that it presents. The US total public debt-to-GDP ratio currently stands at approximately 122%, a dramatic increase from approximately 39% in 1966.

The criteria to consider when building behavioral portfolios include comprehensively addressing tail risks, providing long-term above-inflation growth, capturing gains during rising markets, and preserving gains. In the author’s behavioral portfolio execution example, the conventional Norway model construct of a 60/40 stock/bond allocation, is modified in two ways. First, half of the stocks are placed in a hedged equities fund.

Second, the conventional bond allocation is replaced by adaptive fixed income, allowing the strategy to adapt to negative bond market environments. Therefore, this example of the behavioral portfolio, which is based on Morningstar data, consists of three components: conventional equities (MSCI World NR USD), hedged equities, and adaptive fixed income.

In my favorite section of the book, the author compares his behavioral portfolio with a conventional portfolio and presents several charts for a 16-year timeframe from 2008 to 2023. For example, in the three calendar years in the sample in which the benchmark experienced meaningful losses, the behavioral portfolio showed lower drawdowns, which in some cases (e.g., 2008) were significant. In the sample, the behavioral portfolio had slightly higher average mean returns, an 80% up capture ratio, and a 0.97 correlation to the benchmark during rising markets. Finally, the left tail of the behavioral portfolio is much shorter than that of a traditional portfolio, and the right tail is also compressed.

In addressing the second problem, that of financial advisor–client communication to prevent poor decisions, the author correctly emphasizes the importance of “behavioral coaching,” which can be an important part of the advisor–client relationship. He shares specific, proactive strategies that can train investors to not only understand portfolio components but also embrace contrarian decision making that helps avoid known biases. Communicating the unique value of the behavioral portfolio to investors is an important part of these strategies.

The author argues that financial advisors should shift the emphasis from reactive explanations to proactive preparation in communication with clients. That mindset shift can make a significant impact in helping clients stay disciplined through different market cycles. At the end of the book, Toews adeptly uses the hero’s narrative to describe the advisor’s role.

Toews adroitly critiques the antiquated 60% equity/40% bond portfolio with precision, exposing its flaws in today’s market. Real-world examples drive his points home, making complex financial ideas accessible. For financial advisors and casual investors alike, this is an important book for moving away from traditional investing strategies.

Although The Behavioral Portfolio: Managing Portfolios and Investor Behavior in a Complex Economy was written for advisors, it is also a recommended read for retail investors trying to decide on their own portfolio mix. The book challenges traditional portfolio construction, arguing that many common approaches leave investors exposed not only to economic shocks but also to the emotional responses that often accompany market dislocations.