Advice matters
Beyond predictions: navigating ‘black swan events’ in your investing journey

The rapid collapse of Silicon Valley Bank and Credit Suisse’s battle for survival last month served as a great reminder that seemingly ‘impossible’ events – or ‘black swan’ events – can happen anytime. In fact, they’re not even as rare as once believed. What they are, though, is unpredictable.

To help inform your investment journey, here are some insights into black swan events, their potential impact on the markets, and how you can navigate them with peace of mind.

What’s a black swan event?

The term, coined by former Wall Street trader Nassim Taleb, has become synonymous with seemingly unconceivable incidents that catch everyone off guard. However, as history keeps showing time and again, ‘black swan’ events do happen more often than one might think.

Morgan Housel from the Collaborative Fund put it nicely: “Once-in-a-century events happen all the time because lots of unrelated things could go wrong. If, in any given year, there’s a 1% chance of a new disastrous pandemic, a 1% chance of a crippling depression, a 1% chance of a catastrophic flood, a 1% chance of political collapse, and on and on, then the odds that something bad will happen next year – or any year – are … pretty good.”

Why is it important to know?

Recognising the nature of black swan events is crucial for investors, for several reasons. Firstly, they often lead to sudden and significant market volatility, and since these events are extremely difficult to predict – not to say impossible – it’s important to have a good risk management plan in place to help mitigate their impact on your portfolio.

This plan might include diversification, rebalancing, and most importantly, maintaining a long-term perspective. We’ll return to this shortly.

Overall, it can be argued that investors who acknowledge the likelihood of black swan events are more likely to be adaptable in their investment strategies. It’s all about developing a more resilient mindset, adjusting your strategy when necessary and being well-positioned to seize the unique opportunity that this kind of events may bring.

Some notable ‘black swans’ in history

To put things into perspective, here are eight examples of black swan events that investors have had to face in the past century:

  • 1929: Wall Street Crash, which triggered the Great Depression.
  • 1973: Oil Crisis – the sudden quadrupling of oil prices by OPEC nations, following geopolitical tensions and an oil embargo, led to economic recession and long-lasting effects on global energy policies.
  • 1986: Chernobyl Nuclear Disaster – The catastrophic explosion and subsequent release of radioactive materials from the Chernobyl power plant in Ukraine had severe environmental, health, and political repercussions.
  • 2000: The Dot-Com Bubble Burst – The rapid rise and subsequent collapse of technology shares brought a severe market downturn and marked the end of the tech boom of the late 1990s.
  • 2001: New York terrorist attacks on 11 September, which reshaped global politics and security.
  • 2008: Collapse of the US housing market, which triggered the Global Financial Crisis.
  • 2010: European Sovereign Debt Crisis – Due to unsustainable debt levels, the collapse of several European economies, including Greece, Ireland and Portugal threatened the stability of the Eurozone and required massive bailout packages.
  • 2019: Covid-19 pandemic, whose impact we’re still unpacking today.

These are just some examples: the history of financial markets is dotted with unforeseen events with far-reaching and disruptive consequences. And the reality is that no one knows where the next black swan will come from – be that economic, political, environmental, or technological factors.

So, what can you do as an investor?

As we’ve seen, black swan events are an inherent part of the investment landscape. But while you can’t predict them, you can position your portfolio to weather various market conditions.

Diversification is a good place to start. By spreading your investments across various asset classes, sectors, and regions, you can reduce the impact of a single disruptive event on the overall value of your investments.

The key thing is to keep a long-term perspective. Unless your investment horizon is shorter than 10 years, your investments are likely to have enough time to bounce back. In other words, unless your goals and risk profile have changed, if you have a solid plan you can probably stick to it.

So, ignore short-term market movements, and importantly, avoid reacting emotionally to market turbulence. It could result in selling investments at a loss, only to potentially miss out on a market rebound.

Of course, this doesn’t mean you should set and forget. Regularly reviewing and rebalancing your portfolio can ensure that your asset allocation remains aligned with your risk tolerance and financial goals.

And lastly, stay informed but don’t let ‘market noise’ take over. It’s a good idea to keep up to date with market news and economic trends, but it’s also crucial to filter out sensationalist headlines and short-term fluctuations that may distract you from your long-term investment strategy and goals.

We’re here to help

Need help navigating the current market volatility? Or maybe it’s time to review your investment strategy? Get in touch. We can help you take into account your financial goals and risk tolerance, while also providing ongoing support and guidance.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.