Skjellifetti

Checking In on the All-ETF Portfolio

From your Feb article [my substitution]:

If we have [$BLACK_SWAN], the short-term losses to any portfolio are likely to be far greater than Quantext Portfolio Planner or any other portfolio model can estimate. This kind of massive disruptive event is not what these models are capable of estimating.

...

Ultimately, portfolio models are perhaps most useful because they give investors objective tools to:

1. examine diversification benefits in their portfolios
2. estimate total portfolio risk (albeit not very well for market crashes, wars, epidemics, etc.)
3. estimate total portfolio returns in light of assumptions

It is point number two that I was trying to highlight. MPT is all about creating portfolios with the best return for a given amount of risk. But if we are doing a poor job of estimating risk, then it is not at all clear that we are, in fact, maximizing expected returns per unit of risk. Tools such as QPP may thus be giving us a false sense of security when they recommend, say, a concentrated position in Malaysia over a larger more diversified basket of emerging market stocks.