Dating dangers of the past
In the hands of a drunk driver, the same vehicle can be deadly.
The financial equivalent of racing cars is an efficient frontier model.
We shall see why this even seemingly small change is very important when it comes to efficient frontier models.
Efficient frontier models rely on historical data and relationships to generate the "perfect" portfolio.
The models are marketed to individuals not only over the Internet, but also by many large companies to their 401(k) and profit-sharing participants.
These corporations may view this offering as a way to fulfill their fiduciary responsibility to educate their plan participants.
It also reduces the need to choose between meaningful in a region where pickings are slim, and work that may be further from one's calling in a more populated area.The impact of applying such constraints is similar to what a simple, common-sense approach without modeling would end up with -- a relatively balanced globally diversified portfolio with exposure to all the major asset classes.In other words, don't waste your time with efficient frontier models.Yet that's the underlying assumption of any efficient frontier model.Experienced practitioners know that to come up with something intelligent, they must generally impose constraints on efficient frontier models.