Black Swan Events: Planning for What You Don't Know

June 21, 2021

You don’t know what you don’t know.

Until you do.

And then you beat yourself up for not knowing it sooner or think you should have known the whole time.

This happens in investing too. We call it a black swan event. The term was coined by Nassim Nicholas Taleb, a former option trader and self-described flâneur (ya, I had to look it up too), who published a book on the topic right before the financial crisis of 2008. Taleb defines black swans as events that are hard to predict, of high consequence, and in hindsight seem predictable.1 They can have significant positive or negative impact. On the positive end of the spectrum, think the invention of the computer; on the negative end, think 9/11.

In financial spheres, black swans tend to be associated with adverse events. What might future ones look like? I’ve heard of several. A massive cyber cybersecurity attack that effects bank accounts and/or Wall Street trading itself. Another terrorist attack. Solar energy disabling our beloved technologies. Just scroll through your Facebook feed and you will find apocalyptic ideas aplenty ;).

The problem with the above examples is not that they will not occur, but that the nature of black swans is unpredictability. They encompass massive events that come “out of left field”.

Even though we may not be able to predict what the black swan will be or when it will arrive, we can do our best to plan for unpredictability. Plan for them generally even if you can’t identify them specifically.

Usually, investment planning for a black swan event involves making sure you’ve thought through the impact of major downside risk on your portfolio. Do that! But don’t let fears of a coming black swan paralyze you into investment inaction. Remember, black swans can also be positive. Avoiding the impact of one on your portfolio works both ways. The black swan you miss may not be what causes your portfolio to dwindle but might be the one that causes your future wealth to soar.