What’s a Black Swan event and why should you care?

file000702483299What’s a Black Swan event?

A long time ago, it was just assumed that all swans were white because every recorded swan had white feathers. So black swans were presumed not to exist at all. If even just one black swan were ever sighted it would undo the whole logic of this thought.

The phrase Black Swan was a common expression in 16th century London as a statement of impossibility.

Then in 1697 a guy spotted a Black Swan in Australia and the whole impossibility of Black Swans was disproven.

Wikipedia does a better job explaining it than I do.   http://en.wikipedia.org/wiki/Black_swan_theory

About a year ago I read a book titled “The Black Swan” by Nassim Nicholas Taleb. This guy has more smarts in the tip of his little finger than I have in my entire body. He ran a hedge fund that had really fantastic returns.

He says the criteria for a  Black Swan Event are:

  1. The event is a surprise (to the observer).
  2. The event has a major effect.
  3. After the first recorded instance of the event, it is rationalized by hindsight, as if it could have been expected; that is, the relevant data were available but unaccounted for in risk mitigation programs. The same is true for the personal perception by individuals.

An analogy that Taleb gives makes sense to me. A Black Swan event depends on the observer. “What may be a black swan surprise for a turkey is not a black swan surprise to its butcher.” (Source Wikipedia)

What I found so interesting about him is that, in a way, he admits he doesn’t know anything. I’m paraphrasing, but even though he is the smartest guy that walks into any room, when it comes to investing he really has no idea if things are going to up or down on a daily or monthly basis.

What he does know, is that every once in a while there is a “Black Swan Event”. This is something that no one predicted, no computer model forecasted, and no one really knew what it was going to be. The Black Swan Event causes the markets, or a stock, or some type of investment to move in a big way that most people never expected or saw coming.

So, he places small little bets everyday on things that could become a Black Swan. He is wrong day after day and loses a little bit of money day after day, but then eventually a Black Swan event happens and his little bets pay off in a HUGE way.

It could be Lehman Brothers collapsing, or there’s a terrorist attack, or someone suddenly dies, or the banking sector suddenly has a huge problem.

Taleb has been extremely successful at investing this way.

There’s the thought these days with all the debt, so much globalization, so much social media, and the internet, and massive institutions doing split second trading of billions and billions of dollars, that the occurrences of Black Swan events may become more frequent.

So why am I writing about this?

About a year ago I wrote a blog post WARNING: Every large Bull Market since the Great Depression has been followed by a -20% or great decline.

At that time we were 4 years into the 6th best stock market of all time. Every great bull market has ended badly, you just don’t know when.

Since that time the market has continued to go up, and it’s now the 4th best market of all time. We are up another 14% since last year.

That puts the total at up 160% without a major correction. (As I write this on 6-5-14)

I have no idea when or why it will come to an end, but it always does.

Perhaps a Black Swan Event, that no one saw coming, will be the cause. If that’s the case it will happen fairly quickly.

If that happens, and suddenly the markets are down 40% in a month, will your nest egg be OK, or will it blow up on you?

I don’t have all the answers, but I tell ya. There are lots and lots of people over the age of 60, that have 90% of all their money tied up in mutual funds and the stock market.

Having gone through multiple market crashes/corrections over the past 20 years, it’s scary, especially when most of those people will need to start getting monthly income from those accounts in a few years when they stop working.

After the crash in 2001 it took 8 years just to get back to where they were (assuming they didn’t freak out and sell everything in a panic).

A big decline right before you retire and start taking out income from your IRA/401k can be disastrous.

It’s called sequence of return risk and it can play havoc on your retirement income if you start withdrawing income from investments that go up and down in value.  I go into more detail about that in my guide “The Definitive Guide To Hybrid Annuities” on page 20.

This isn’t meant to be a Debbie Downer post that leaves you all depressed. Think of it more like a good chance to check yourself and make sure you’ll be ok if some weird stuff starts happening.

Whatever your approach is to investing your retirement money, just please make sure that your future income needs won’t be dramatically affected by a Black Swan event, especially if you are right on the cusp retirement.

No one ever went broke taking a profit. Maybe it’s time, after this huge run up, to take a little money off the table and keep it safe for the future.

Warmest regards,


P.S. My clients like the safety and guarantees that come with annuities.  You may want some more safety and guarantees in your life too, but you just don’t know where to start or who to talk to.

If you want to chat about it, feel free to reach out to me and maybe I can help point you in the right direction.


  1. Mike Heaney says:

    Good job Carl

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