Brock has little time for what he considers small-minded economists. "It's the coin-flip problem," he says. "It's only when you consider that the future will not be like the past that you're getting somewhere."
Optimizers are shuffling around in a whole mix of historic returns. That's what I take away from Brock. Historical returns don't recur. Why should they? Advisors offer "expected return," such as "you can expect a 6% return from emerging markets over time and you should put 5% of your portfolio there. It sounds so precise and well documented. But those are really historical returns. The historical return becomes the expected return." Another truism that's being tested: If the time period grows longer, risk goes down. But now some economists say that the shorter your holding period, the less likely you are to encounter a black swan. As Brock says, in order to invest, you must have a notion about the future.
Mary Rowland can be reached at r[email protected]. She has been a business and personal finance journalist for 30 years and has written two books for financial advisors: Best Practices and In Search of the Perfect Model.