Black swan events
A financial market website discussing the ups and downs of the markets and potential risk exposure of your assets would not be complete without a few words on “black swan events”.
A black swan event in financial terms is an unpredictable event that is beyond what is normally expected in the markets, and can potentially have very severe consequences.
Such events are characterised by their extreme rarity, their severe impact, and the widespread financial damage that ensues.
As I write this website today, we are in the middle of the Covid-19 pandemic of 2020-2021, where most of the world has been in an unprecedented “lockdown”, which is obviously not very good for business, or stock markets.
If you looked at the world index in March 2020, it would show the dramatic and sudden collapse of the stock markets during the last week of March 2020. Billions, if not trillions of Pounds and Dollars were lost from the markets during that week, and every stock market investor in the world will have suffered some degree of losses.
Interestingly, the graph also shows the remarkable recovery of the markets to where they originally were, in just under five months. Inexperienced investors may have panicked and sold out with such an event, crystallising their losses, whereas more experienced investors will have used this opportunity to buy more assets at reduced prices.
Other black swan events of recent decades include the terror attacks of 9/11 and the financial crises of 2008.
Black swan events are unpredictable and potentially very financially damaging. By the time the event has happened, the markets will have crashed, you will have already incurred papers loses compared to where you were the previous day, and selling your assets in a panic could just crystallise those losses as noted above.
The more logical response to such events by long term investors is just to sit tight and wait it out. You may even decide to buy more assets at such a reduced price, knowing that in the long term, the prices should rise again.
Sale now on!
Following two consecutive days of circa 10% falls in the market, I noticed that the FTSE all share index was trading at the same level it was ten years earlier, and so I used this current market event, to add to my positions.
This was in effect, simply buying assets cheaply in the sales!
In the ten year FTSE all share graph, you could see that the low point of March 2020 of just under 3200, was a similar position to where it was in 2011. Therefore allowing investors to buy the index at prices last seen nearly a decade ago.
The key takeaway here is just to know that these events happen every once in a while, and to be aware of the likely short term damage to your investments.
It’s not nice, it feels unpleasant to say the least, but there isn’t much you can do about it, other than educate yourself, and be prepared.
FACT: Significant falls in the world’s stock markets are often followed by an equally significant move upwards soon afterwards. If you sell your assets in a panic, you may lock in the losses of the fall, but miss the subsequent rise.