False Precision in Portfolio Construction: Misconceptions That Undermine Asset Allocation
Abstract
Despite advances in data, models, and analytics, many persistent misconceptions continue to shape multi-asset portfolio construction and asset allocation. This paper argues that these errors are structural rather than informational, arising from the routine use of simplified risk measures, diversification heuristics, and benchmark-relative frameworks in multi-asset strategies. In this article, we examine how commonly used tools, such as volatility, correlation, backtests, and performance metrics, can obscure portfolio-level risk, overstate diversification benefits, and misrepresent strategy robustness, particularly during periods of market stress. The article emphasizes that effective multi-asset allocation relies less on optimization precision and more on judgment, governance, and a clear understanding of how risks interact across assets and strategies over time.
Fields of Study & Subjects
Financial Markets and Investment Strategies
Risk and Portfolio Optimization
Financial Risk and Volatility Modeling
Publication details
- Journal / source
- The Journal of Portfolio Management
- Publisher
- With Intelligence LLC
- Volume
- 52
- Issue
- 5
- Pages
- 162–177
- Publication date
- 19 January 2026
- Language
- EN