Don’t feel too bad when a black swan lands on your Investing portfolio.
A black swan event can be referred to as an unexpected chain of events that rise with unprecedented speed. Markets and humans tend to become overwhelmed when such events rise, often to the detriment of their decision-making processes and subsequently investment portfolios. Black swans can make even the most diversified portfolios fall 30%, 40%, and even 50%.
Black swan events are impossible to predict, and by virtue can be described as an “unknown’s unknown”.
- The 2008 financial crisis was a black swan event;
- Covid-19 was not a black swan event; &
- Russia Ukraine conflict may become a black swan event.
– The event must be unpredictable;
– The event has widespread impact; and
– Hindsight bias arises once the event has occurred.
The only reason as to why covid is not considered to be a black swan event, is due to the fact that previous pandemics have occurred in history, and therefore make it somewhat predictable.
In the case of Russia, things remain to be seen, some may argue that Russia moving away or against Europe may actually have been expected, however, further developments may lead to widespread financial implications which may render the event a ‘black swan’.
During the drop in the stock market, the occurrence of a black swan event reaps massive uncertainty within the market and leads to a rise in bad sentiment over the future of the economy, markets, and possibly even humanity.
However, we need to remember that black swan events have happened many times in history, and if it’s one thing history tells us, it’s when the bargains arise, allowing investors to buy great companies at perhaps discounted prices unless, of course, it really is the end of all humanity.
Let’s keep things practical and relevant, the media has a huge impact on sentiments in the markets. It is what sells and ultimately makes their businesses models so lucrative. When things are good, it’s momentum-styled publications that create the best impression, the most interaction, and the greatest profits. Likewise, in times of adversity and uncertainty, it’s the negative-styled publications that sell the most and generate the biggest profits.
This inevitably triggers uncertainty and irrationality by investors, even more so retail investors. This may lead them to fall into a trap of buying insurances, and hedges which are in themselves riddled with uncertainty, and may not even protect you from future black swan events.
Keep cool, and don’t feel too bad about the black swan sitting right on-top of your portfolio.
Looking Forward -
Why does GDP keep rising?
The reason that GDP, corporate earnings, and market returns trend up over time is that human productivity driven by innovation and ingenuity increases, if it’s one thing that covid taught us, it’s that crisis provokes innovation.
Likewise, progress is not linear so we shouldn’t expect the cashflows and investment returns derived from our investments to be linear, especially when you consider the additional emotional impacts of greed and fear on markets. Expect the downfall of your stocks during times like these, no other way to put it.
However, as things progress expect increases in GDP, innovation, and ingenuity to keep driving the markets higher, once we overcome the current hurdles.
To wrap It Up
Warren Buffet famously said
- “Be Fearful when others are greedy and greedy when others are fearful”; and
- “Market timing is extremely hard”.
It’s easier to not be greedy when others are greedy and stash away some capital for the inevitable rainy day.
When the rainy day comes, we shouldn’t beat ourselves up for not predicting it. That was never the game that we should have played in the first place.
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Any views or opinions presented in this article are personal and shouldn’t be taken/used as professional advice as we are not qualified financial advisors.
Any statistics mentioned have all been linked to their respective documents together with their ownership.
Lastly, we would like to note that this article has no tie to our professional jobs and was conducted in our free time.