Savio,
Great questions. I put some quick thoughts below:
1. Potential investors that I have spoken to, both institutional and retail, look for strategies that can deliver absolute returns. While risk adjusted returns are interesting to them, using the numbers in table 7 in your article they would prefer a strategy using the tangency portfolio over the other two, even if I argued the merits of risk-adjusted returns until I was blue in the face.
I concur, "educating" clients on various issues can be incredibly difficult. Some folks just love buying complex and sophisticated products. Simple doesn't sell, even if it works. Not sure how to fix that problem.
2. A buy and hold strategy is exposed to the sequence of returns risk, particularly for investors just entering retirement, who invest at the top of the market.
Agree, so you want to think about diversification, risk-management, trend-following, alternatives, etc. But you still want to review these more sophisticated exposures through the lens of the FACTS.
3. In the sample I have (1999-2014, mix bag of asset classes) the equal weighted portfolio underperformed the tangency portfolio on both absolute and risk-adjusted measures. However since the strategy I am using is different to that you described it is not an apples to apples comparison.
There will always be episodes where tangency will beat min variance and min variance will beat equal-weight and equal-weight will beat momentum, etc etc. The volatility in the marketplace is so extreme, the distribution of outcomes are all over the map. When researchers have looked at the problem over the long-haul it seems as though simple allocation models work better than the "book answer", which is the tangency portfolio I teach in MBA investment management classes. Great theory; poor empirical track record.
4. Returns, net of fees and taxes, are the only consideration for the people I have spoken to. So, as you point out, taxes (short-term capital gains in my case) are a very important consideration for a product designer. Fees seem to be less of an issue to investors so long as they can earn reasonable returns (4-6%) after fees and taxes.
Agree 100%. Taxes ARE THE 800lb gorilla in the room. Fees, while an important consideration, are secondary to Uncle Sam's 50%+ performance fee every year.
A quick write up on the subject:
http://www.alphaarchitect.com/blog/2014/12/09/etf-vs-mutual-fund-tax-ef…