Black Swan Events & Your Investments

Dear Valued Financial Partners and Friends,

Black Swan Events are events that are unexpected and unprecedented. They are rare and have an extreme impact when they occur. The concept of a Black Swan Event was popularized in Nassim Nicholas Taleb’s book, “The Black Swan: The Impact of the Highly Improbable” (Penguin, 2008).

Some modern day Black Swan Events include the sudden outbreak of World War I, the surprise attack on Pearl Harbor in December 1941, and the sudden terrorist attacks in the United States in September 2001.

Shortly after September 11, 2001, I attended a financial presentation where the instructor had prepared two charts and adjusted them to the same scale. The first chart was the S&P 500 Stock Index in the days just before and immediately following the surprise military strike at Pearl Harbor on Saturday, December 7, 1941. In my mind the instructor’s graph documented and encapsulated the general public’s human, sell-off reaction to this Black Swan Event as evidenced by the size of the stock market drop.

The second chart was the S&P 500 Stock Index in the days immediately surrounding the surprise terrorist attacks on Tuesday, September 11, 2001. Again, this second chart depicted our human, sell-off reaction to another rare, but major Black Swan Event by the size of the stock-market drop.

Now the magic! Remembering both charts were adjusted to the same scale, when superimposed, the two charts became indistinguishable! In 2001, our sell-off reaction, our human behavior was, for all practical purposes, identical to that of our predecessors—some 60 years earlier—by dropping approximately the same percentage.

The bottom line: No one knows when the next Black Swan Event will occur. Whether man-made or not, Black Swan Events will continue. Earl Nightingale stated in his book, The Essence of Success,“Only eight percent of your worries are worth concerning yourself about. Ninety-two percent are pure fog with no substance at all.”

Black Swan Events will inevitably happen in the future. The challenge is to stay invested so that you don’t miss out on market opportunities. Don’t allow your personal emotions to keep you from reaching your long-term goals.

Bullish Best Wishes,

Roger M. Smedley, CFP®

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