The Old Ways Are (Sometimes) the Best: The Performance of Simple Mean-Variance Portfolio Optimization in Various Markets

We study the performance of mean-variance optimized (MVO) equity portfolios for retail investors, in various markets in the U.S. and around the world. Actively managed equity mutual funds have relatively high fees and tend to underperform their benchmark. Index funds such as ETFs still charge appreciable fees, and only deliver the performance of the benchmark. We find that an MVO is relatively easy to manage by a retail investor, and that they tend to outperform their benchmark or, at worst, equal its performance, even after adjusting for risk. Moreover, we show that the performance of these funds is not particularly sensitive to the frequency at which they are rebalanced so that, in the limit, an investor might have to rebalance her portfolio only once per year. This last finding translates into very low trading costs, even for a retail investors. Thus, we conclude that MVOs offer an easy, cheap alternative for a retail investors to invest in the world’s equity markets.