Let’s talk about a habit we’ve all seen in this business: portfolios built by filling up style boxes. You know the drill—large-cap value, small-cap growth, mid-cap blend, international, and so on. It looks diversified. It checks all the boxes—literally. But here’s the thing: that’s not what Modern Portfolio Theory was meant to be.
The Style Box Police
The investment world likes using style boxes because they’re simple and look good in marketing. But these boxes don’t really connect to Modern Portfolio Theory (MPT). Economist John Cochrane says:
“I don’t even know what these names mean. As a finance professor, they don’t make much sense to me.”
– Advisor Perspectives
These style boxes make fund managers stick closely to the market instead of trying to build truly diverse portfolios. One expert explains:
“We criticize managers when they change their style. We expect them to stick to their plan… Even though we chose them for their talent, we really want them to copy the index.”
– Advisor Perspectives
This strict approach makes advisors focus on filling all nine boxes instead of asking the real question: Do these investments actually work well together?
Focus on wHAT MATTERS
Harry Markowitz didn’t write about style categories. He wrote about relationships—specifically, how assets interact. His goal wasn’t to build portfolios that look balanced. It was to build ones that are balanced. And balance, in this context, means mixing assets that don’t all move the same way at the same time. In other words, the assets are lowly correlated.
“A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole,” Markowitz said. That idea—balance through low correlation—is at the heart of true diversification. Not labels. Not grids.
Somewhere along the way, though, we got lazy. Or maybe just too comfortable. Style boxes made it easier to explain portfolios to clients. They made it easier to package products. And yes, they made it easier to sell. But in simplifying the story, we also simplified the process—too much.
The result? Portfolios that look diversified on paper but really aren’t. You can own five funds in five different style boxes and still be loaded with the same underlying exposures, high correlation, and concentrated risks—just dressed up in different clothes.
William Sharpe, who gave us the Sharpe ratio, didn’t talk about style boxes either. He talked about efficiency—getting the most return for a given level of risk. “The reward-to-variability ratio is what matters,” he said. Not balance by category. Balance by behavior.
So what should advisors do instead?
Here’s where technology actually helps. A good portfolio optimizer doesn’t care about style boxes. It doesn’t care if you’ve got the right “blend” of value and growth. What it does care about is how each asset interacts with the others. Correlation, expected return, volatility—that’s what it runs on.
When used properly, an optimizer helps you build portfolios the way Markowitz imagined. You feed it realistic inputs—returns, risks, relationships—and it helps map out combinations that make sense for the actual goal: more return per unit of risk. It does the math so you can do the thinking. BASED ON CORRELATIONS.
You don’t have to guess or hope the boxes cover all angles. You can see how the pieces fit together—or don’t. You can stress-test exposures. You can run scenarios. You can make smarter choices, not just prettier charts. The iQ Portfolio Optimizer helps with this.
Style box allocation is a diluted version of real portfolio theory. It’s a shortcut—one that’s more marketing than math. And it’s time we moved on from it.
We owe clients better than grids and guesses. Let’s build portfolios that work under the hood—not just look good on the brochure.