Conclusion: Art versus Science

Designing investment portfolios—and especially portfolios for taxable investors—is more art than science. But it has to be done: We have to have a structure to guide the investment of our capital, and that structure has to be fundamentally related to the risks we will be facing as we invest. Traditional mean-variance optimization was a way of getting at these issues, and over the years other approaches have been suggested as well, including the Black-Litterman process I have highlighted.

In the future, there will no doubt be newer and perhaps better approaches to the challenge of portfolio design. But the industry will never develop a fail-safe approach that works for everyone because the markets are full of uncertainty. What matters is the thoughtfulness of the process itself.