An internet search for April 17, 2007 at onthisday.com reveals that nothing happened. Certainly, nothing as significant as a Black Swan event. Or did it? A Black Swan is an impossible to predict event that had a massive impact. Impossible because it had never happened (so it seems), yet self-styled experts will invent explanations.
Yet, something did happen - the publication of The Black Swan: The Impact of the Highly Improbable, by Nassim Nicholas Taleb. By the end of 2008, Black Swan events and Taleb’s book were the talk of investment strategy committee meetings all over the world. The mortgage-backed securities market had collapsed. This triggered an international crash in real estate, equities, commodities, low-quality debt, and a deep global recession.
The common wisdom was that there was nowhere to hide, every asset class became highly correlated, and they all lost significant value. While hand wringing became a sport, advisors practicing True Wealth Management had anticipated the possibility of this event. They also invested clients in truly non-correlated assets and dusted off their contingency plans. If a strategic change was needed, it was based on the investor’s Funding Status, an appraisal of their lifestyle values, and cash flow objectives.
The contingency plans were labeled the Ideal Scenario and the Acceptable Plan. Each analysis integrated different saving, spending, lifestyle what-ifs, and risk exposure options, and memorialized in the investor’s Values and Goals Matrix. When the possibility of a Black Swan event is discussed before it happens, implementing a contingency plan becomes routine.
The same internet search for February 22, 1980 reveals something happened - a Black Swan event in Lake Placid. With one second remaining in the first period of the semi-final game between the USA and Soviet hockey teams, American Mark Johnson tied the game at 2-2. The Soviet goaltender was Vladislav Tretiak, the best in the world, playing for the best team in the world.
The Russian coach, Viktor Tikhonov, did what many traditional investment advisors would do – replace the underperforming asset manager. Yet, there is one big difference. While Tretiak was still the best, the funds that went from champs to chumps were doing what they were hired to do – avoid the reality of efficient markets.
Another internet search, this time for March 16, 2020 reveals that the Wuhan virus became a global threat and the Dow Jones Industrials set a record for points lost – 3000. The week before, as markets were reeling, Affluent Capital’s advisors wrote this to every client, “We anticipated this. We did not predict it because we don’t make predictions. This market was included in our random simulations. This is central to the accounts we manage for you.” Our goaltender was doing marvelously.
Just as relevant, extreme markets also soar to the upside. In a bell curve distribution of returns, which is true for stocks – not bonds, they happen with nearly equal regularity. The summer of 2020 is a prime example, and the advisors at Affluent Capital monitor their clients Funding Status during those as well. Despite the headlines, confidence is the norm, not chaos.
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The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. Past performance is no guarantee of future results. No person or system can predict the market. There is no guarantee that any strategies discussed will result in a positive outcome. You should discuss any legal, tax or financial matters with the appropriate professional. All investing involves risk and no investment strategy can guarantee a profit or protect against loss, including the potential loss of principal. The Dow Jones Industrial Average is a widely watched index of 30 American stocks thought to represent the pulse of the American economy and markets. Investors cannot invest directly in an index.