Article on portfolio management

[Izverg04]

I plan to start investing seriously soon, and I'll start with a passive index-fund approach. I've been reading for a couple of weeks now, posts on Vanguard Diehard forums, articles on efficientfrontier.com, and whatever else I was finding. I think I am an expert on risk management from gambling stuff, so I was looking for something a little more advanced than generic 80% stock / 20% bond recommendations. For the first time, I found almost exactly what I was looking for:

http://hec.osu.edu/people/shanna/chen.pdf

They optimize the expected utility of a portfolio, given different scenarios. The utility function they use, U(W)=W^(1-x)/(1-x) is the same one used in Kelly formalism. What they call the relative risk aversion factor x is exactly the same thing as the Kelly factor (x=4 means Kelly/4 bettor).

There is lots of cool stuff in there. For example, they cite that for a typical American x=6. This is interesting to me, because I think x is higher than that even for professional gamblers on this board.

Still, their results indicate, that any way I slice it, I should be investing 100% of my portfolio in small-cap stocks for a long while. Other results are posted in Table 1 and Figs 1 and 2. What they mean by "Financial Assets" is what you have to invest, and by "Total Wealth" they mean the added value of everything you have now plus what you'll save in the future, discounted by time. Kind of playing bankroll vs. total bankroll.

So does anyone find their analysis unsound? Should I believe their numbers and invest 100% in small-cap? Or have things changed since 1997? I'd also appreciate links to other articles with similar level of discussion.