April 8, 2020
I may have shared with you that I am a closet history nerd. Certain topics fascinate me more than others but recently I have been reading a lot about economics and finance, events that changed world views, things of that sort. I suppose it is kind of a job hazard. Although with history, of course, comes philosophy and theory, which I am much less captivated by, but given the state of the world as we are all experiencing in the present, it’s hard not to consider the black swan theory.
Swans happen to be one of the most beautiful and elegant birds on the planet, in my humble opinion. To me, there is something majestic about them. The idea of a black swan was a myth long ago when they were not believed to exist. Because the only historical records of swans indicated they only had white feathers, Dutch explorers were shocked to discover black ones in Western Australia. From this the modern term was coined – a “black swan” is an unpredictable thing or event that is beyond what is normally expected of a situation. Black swan events are characterized by their extreme rarity, their severe impact and potential consequences, and the widespread insistence they were obvious in hindsight. Back to real swans and as a very basic example, we could argue that yes, it would make sense that evolution would cause varietal changes in the species over time even though way back when it was not fathomable.
Now please know as you are read this, I refused to take philosophy courses in college and statistics was the very last course I took because I disliked it so much. I share this background in the simplest way I can, but yes, it does make my head hurt a little too! The black swan theory was popularized by Nassim Nicholas Taleb, who was a finance professor, writer, and former Wall Street trader, to explain that it is impossible to predict “black swan events” due their extreme rarity yet they have catastrophic consequences, so it is important for people to always assume that a black swan event is a possibility, whatever it may be, and that we should always plan accordingly for that possibility.
This theory directly relates to how we should all be managing our wealth in terms of our future goals and potential needs. The financial crash of the U.S. housing crisis during 2008 is one of the most recent and well-known black swan events. Another would be the dot-com bubble of 2001. And now we are facing the coronavirus which we all must admit is an event that really felt unpredictable, yet it is gravely impacting many people’s financial lives and now we are all looking at our personal circumstances and wondering if we could’ve planned better or been more prepared for this financially. Therefore, during times like now, financial planning and portfolio management becomes so much more important.
As I’ve discussed previously, there are many components of financial planning. One of the most important parts of your financial plan is to determine your threshold for risk and make sure that your investment program mirrors the appropriate level based on your personal feelings. Investors are not cookie-cutters and there is not a one-size-fits-all solution for how people have their money allocated. Diversification and quality remain key, and with the correct recipe selected based on the input from you as the investor, you should be able to withstand the unpredictable outputs of a black swan event such as we are experiencing now. If we are true to our feelings and our plan is aligned with those as beacons to maintaining a consistent approach, financial storms such as this are much easier to weather.
Let’s think of this in broader terms: could we have predicted a pandemic like this? No, but in hindsight it has happened before so it’s reasonable to assume it could happen again, therefore, planning continues to be essential. I started my career on the heels of the dot-com bubble in 2002, I went through the 2008 financial crisis with many clients, and now I am in the middle of the coronavirus pandemic with everyone I know. I think it’s fair to say that at some point hopefully in the very distant future we will yet again experience an event that will impact our lives in a financial and personal way. How should we prepare? By sticking to the financial plans, we create together. If we do, and only make adjustments based on the everyday things we consider and not react to fear, we are in a much better position to get through the shadows cast by another black swan.
Iris Buczkowski is the founder of Birch Wealth Management (birchwealth.com). Original content provided by Iris is for educational purposes only and should not be construed as investment advice.