BLACK SWAN EVENTS: ARE YOU COVERED?
A black swan is a negative event that is extremely difficult to predict. Although these events are rare, their damage goes out of expectation and leads to severe consequences that can take years to bounce back from. If you are closer to retirement, a major financial setback caused by a black swan event will be detrimental on your standard of living in retirement. Black Swan Events can be defined by three attributes*
An event that is unpredictable to the observer
A black swan event results in severe and widespread consequences
After the occurrence of a black swan event, people will rationalize the event as having been predictable We can look back to five recent black swan events that had detrimental effect on investor’s portfolios
1. THE 1997 ASIAN FINANCIAL CRISIS*
Several Asian markets experienced currency devaluations, starting when Thailand unpegged the baht to the US dollar. Asian currencies dropped in value by as much as 38%. Internationally, stocks declined by nearly 60%
2. THE “DOT-COM” BUBBLE*
The dot-com bubble occurred after a period of high stock valuations between 1994 and 2000 due to a period of massive growth in the use and adoption of the internet. Between August of 2000 and October of 2002, the S&P 500® decreased by 42.04%**
3. 9/11 ATTACKS
The attack on the Twin Towers of New York’s World Trade Center prompted the closure of the NYSE and NASDAQ on the morning of September 11, 2001. Stocks plummeted during the first trading week after 9/11 – $1.4 trillion dollars in stock market value were lost within a week.
4. THE 2008 GLOBAL FINANCIAL CRISIS
In 2008, financial markets worldwide were marred by severe losses caused by widespread failures in US financial regulation. From October 2007 to March 2009, the S&P 500® decreased by 49.94%2
5. BREXIT
In June 2016, the British referendum result to leave the European Union caught investors off guard. The British pound declined quickly to a 31-year low against the dollar and resulted in nearly $2 trillion worth of losses in the global markets.
Have you properly prepared against a black swan event? Look into safe money alternatives with WealthVest to help hedge against black swan events.
* Corporate Finance Institute, Black Swan Event, Accessed December 27, 2019 https://corporatefinanceinstitute.com/resources/ knowledge/finance/black-swan-event/
** Home Page of Robert J. Shiller. Accessed December 12, 2018. http://www.econ.yale.edu/~shiller/data.htm.