EP 257: The Behavioral Portfolio with Phillip Towes

by Peter Lazaroff | May 20, 2026 | Investing, Podcast

Watch Now

Listen Now

I’m joined by Phillip “Felipe” Toews, author of The Behavioral Portfolio, to discuss why good investing is about more than selecting the right mix of stocks and bonds.

In this conversation, Phillip explains why portfolios need to address both the economic realities of markets and the behavioral realities of investors. We talk about why traditional balanced portfolios can be harder to stick with than many people realize, how valuations should influence expectations, and why advisors need proactive communication frameworks—not just better investment products—to help clients navigate market stress.

We also discuss the difference between volatility and true risk, the role of earnings and valuation multiples in stock returns, and why the best portfolio is not necessarily the one that looks perfect on paper, but the one investors can stick with through losses, long stretches of underperformance, bubbles, inflation, and regret.

Sign up for my newsletter so you can easily reply to my emails with your thoughts or questions for the podcast:

Advisors Have Behavioral Biases, Too (1:30)

A major theme of the conversation is that advisors are human, too.

Phillip makes the point that having a CFP designation or other professional credentials does not eliminate behavioral bias. Advisors can still feel fear, regret, overconfidence, career risk, and pressure to act when clients are upset.

But he adds an even more important point: even if the advisor is not personally vulnerable to a specific bias, the advisor may still be forced into a bad decision by the client relationship. When a client is scared, frustrated, or impatient, the advisor who lacks a clear communication framework may eventually give in to the client’s desire to change course.

That is why behavioral coaching cannot simply be reactive. It needs to be built into the client experience before the market crisis arrives.

Why the 60/40 Portfolio Wasn’t Built From First Principles (3:54)

Phillip refers to the conventional balanced portfolio as a “historical accident.”

His point is that stocks and bonds were not created because someone sat down and asked, “What exactly do investors need economically and psychologically from a portfolio?” Bonds were created to fund governments and companies. Stocks were created to share ownership in businesses. Over time, those publicly traded securities became the primary building blocks for portfolios.

The traditional 60/40 framework emerged from the tools investors had available, not necessarily from a complete analysis of what investors need.

Phillip argues that today’s investment toolkit is broader. Investors and advisors have access to options, hedging strategies, derivatives, risk-managed strategies, and other portfolio tools. That does not mean every investor needs a complex portfolio. But it does mean advisors can ask a better question: what does this investor need the portfolio to do, both financially and behaviorally?

When “Long Term” Feels Too Long (6:04)

Phillip’s book does quite a bit of historical stress-testing of balanced portfolios.

He walks through how a balanced portfolio might have behaved during the Great Depression with real-world assumptions such as fees and rebalancing. The conclusion is sobering: even a balanced portfolio could experience a drawdown that would be nearly impossible for many investors to endure.

The important point is not to predict another Great Depression. It is to recognize that market history is wider than the recent experience most investors have lived through.

Phillip also points to Japan’s multi-decade bear market and the long U.S. bond bear market from the mid-1940s to the early 1980s. Most investors do not look back far enough or geographically wide enough when forming expectations. That narrow frame can make recent market history feel more reliable than it really is.

This is especially relevant for DIY investors who have experienced an unusually favorable stretch for simple, U.S.-heavy portfolios. A strategy can work over a 30-, 40-, or 50-year period and still feel unbearable during a difficult decade.

Why Valuations Matter for Planning Assumptions (12:08)

Our conversation then turns to valuation and financial planning models.

Most investors and many planning tools rely heavily on long-term average returns. That can be useful, but it can also create a false sense of precision if the model does not account for starting conditions.

Phillip highlights two important examples.

For stocks, valuation metrics like the cyclically adjusted price-to-earnings ratio, or CAPE, can help frame future return expectations. At the time of this April 2026 recording, CAPE was in the high-30s, and MULTPL listed the Shiller P/E at 38.93 on April 1, 2026.

For bonds, starting yield is often a useful guide to future returns. When yields are very low, the forward-looking return potential for high-quality bonds is meaningfully different than when yields are higher.

The challenge is not simply identifying that valuations are high or yields are low. The harder question is what to do about it. Phillip’s answer is not to abandon optimism, but to build portfolios and planning assumptions that address contingencies more explicitly.

Earnings, Valuations, and the Optimism Embedded in Stock Prices (15:00)

A key part of the conversation focuses on what actually drives stock returns.

From my perspective, stock returns come from three main sources: cash returned to shareholders through dividends and buybacks, changes in earnings, and changes in the price investors are willing to pay for those earnings.

Phillip builds on that by describing valuation multiples as a form of leverage on earnings.

When earnings grow and investors are also willing to pay a higher multiple for those earnings, returns can be amplified. This is one reason long bull markets can feel so powerful. Earnings rise, valuation multiples expand, optimism increases, and the whole process can become self-reinforcing.

But the same mechanism works in reverse.

If investors are paying 22 or 23 times earnings and that multiple later falls to 10 or 12 times earnings, the market can experience a severe decline even before considering any deterioration in corporate profits.

Phillip distills the idea into a simple point: when investors buy the stock market, they are buying optimism. Publicly traded companies often trade at higher multiples than small private businesses because investors expect future growth. When that optimism fades, prices can adjust quickly.

Why Risk Is More Than Volatility (20:29)

The financial industry often uses volatility as a proxy for risk. Volatility simply means prices move up and down. But Phillip argues that most investors are not afraid of “up and down.” They are afraid of “down, down, down.”

That distinction matters.

Volatility can sound temporary and manageable. It implies a portfolio falls, then rises again. But the real risk investors care about is the possibility of permanent impairment, running out of money, failing to meet goals, or being forced to abandon a strategy at the wrong time.

In my opinion, risk takes many shapes. There is the risk of running out of money. There is also the risk of dying with regret because you were so focused on eliminating financial risk that you never used your money to live the life you wanted.

So I believe that a better definition of risk begins with goals. What are you trying to accomplish? What could prevent you from getting there? Which risks are necessary, and which are unnecessary?

Behavioral Coaching Starts With Portfolio Design (24:37)

Phillip makes an important point about behavioral coaching: it should not start after the portfolio has already failed the investor emotionally.

He uses the analogy of a car that is supposed to move forward but instead keeps going backward. You would not start by sending in a behavioral coach to make the driver feel better about the car going in the wrong direction. You would first try to fix the car.

In portfolio terms, that means the first step in behavioral coaching is portfolio design.

If a portfolio is likely to expose an investor to risks they cannot emotionally or financially tolerate, no amount of coaching may be enough. The portfolio itself needs to reflect the investor’s real-world needs.

Phillip describes this as investing optimistically while also addressing contingencies. Investors need exposure to growth, but they also need a plan for major stock market declines, major bond market declines, inflation, rising rates, and stagflation.

The Power of Proactive Communication and Pre-Commitment (26:12)

Phillip argues that many investors do not fully understand how bad markets can get, how their portfolios are designed to respond, or what the plan of action will be during a crisis.

That creates a communication gap.

His proposed solution is proactive communication around known investment challenges. Instead of waiting for a crisis, advisors should talk in advance about the kinds of market events investors are likely to face.

That includes large losses, long periods of low or no returns, underperforming strategies, not participating in bubbles, inflation, and rising interest rates.

The key is to pair the challenge with a plan. Talk about what could happen. Explain how the portfolio is designed to address it. Provide historical context. Then ask for a pre-commitment from the investor.

Phillip shares an example of an advisor whose clients called during the financial crisis asking when they were going to rebalance back into stocks. That is the goal: investors who understand the plan well enough to make difficult contrarian decisions during stressful markets.

Underperformance May Be the Hardest Behavioral Challenge (28:52)

Losses are painful, but underperformance can be especially difficult.

I started my career in 2007, when many investors preferred international stocks and especially China. For much of the following decade, the preference flipped, and many investors wanted nothing to do with international stocks. Quantitative value investors also experienced a long period of underperformance that was still within the range of expected outcomes but felt broken in real time.

This is where regret becomes so powerful.

Investors can see the alternative path on a scoreboard every day. Even if the original decision was reasonable based on the information available at the time, a bad outcome can make the investor feel like they made an obvious mistake.

That is why setting expectations in advance matters. If investors are not told that underperformance is part of the expected experience, they are more likely to conclude that the strategy is broken.

The Advisor Opportunity in Behavioral Coaching (30:50)

Phillip closes by emphasizing the opportunity for financial advisors.

Robo-advisors did not eliminate the need for human advisors, and AI-driven advice may create another wave of pressure on the industry. But Phillip argues that one of the most durable forms of advisor value is helping investors make better decisions when markets are challenging.

He points to Morningstar’s research on the investor return gap, which distinguishes between a fund’s total return and the return investors actually earn after accounting for the timing of their cash flows. Morningstar describes this gap as an important issue because investor returns reflect the impact of purchase and sale timing, not just the underlying investment return.

If advisors can help clients reduce or eliminate that gap through better portfolio design, proactive communication, and behavioral coaching, they may deliver value that more than justifies their fee.

More importantly, they can help investors experience greater peace of mind and a smoother path toward their goals.

Resources:

The Long Term Investor audio is edited by the team at The Podcast Consultant

Submit Your Question For the Podcast

Do you have a financial or investing question you want answered? Submit your question through the “Ask Me Anything” form at the bottom of my podcast page.

Support the Show

Thank you for being a listener to The Long Term Investor Podcast. If you’d like to help spread the word and help other listeners find the show, please click here to leave a review.

I read every single one and appreciate you taking the time to let me know what you think.

Free Financial Assessment

Do you want to make smart decisions with your money? Discover your biggest opportunities in just a few questions with my Financial Wellness Assessment.

Disclosure: This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Plancorp LLC employees providing such comments, and should not be regarded the views of Plancorp LLC. or its respective affiliates or as a description of advisory services provided by Plancorp LLC or performance returns of any Plancorp LLC client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Please see disclosures here.