Black Swans & The Certainty of Uncertainty

Corenna Roozeboom Life with Money

Rarely but inevitably, a single event will flip the world upside down – the kind of improbable, unexpected thing that occurs on a day just like any other, but then alters life as we know it.

Sometimes that thing is devastating, such as a freak accident or the sudden death of a loved one. Sometimes it’s delightful – a newfound opportunity, a chance encounter, or a lucky break.

• • •

I first learned about Nassim Nicholas Taleb’s “black swan theory” in February 2020. Little did I know that a black swan event was about to alter my world – and everyone else’s as well.

I was reading a review of Taleb’s The Black Swan: The Impact of the Highly Improbable, written by our late cofounder Victor Levinson in 2007. Taleb defines a black swan as an event with the following attributes:
black swan event
“First, it is an outlier … because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

Vic explained the metaphor: “The Black Swan references the idea that there was a time in the past when only white swans appeared, to the point where people thought only white swans existed. It took the appearance of one black swan to change that ‘certainty.’”

• • •

Had I known the pandemic was just around the corner, I would have predicted that the markets would tank. And they did – for about a month.

And yet, as we noted at the end of 2020, “the stock market recovered surprisingly (in many cases, stunningly) well after bottoming out in late March … The Vanguard U.S. Stock Index Fund, which represents all the public traded companies in the U.S., rose 21%. The stock indices are at or near all-time highs.”

It turns out, the markets are so unpredictable that even knowing ahead of time about a black swan event does not guarantee how markets will react to it.

To quote ourselves again in late 2020:

“As compiled by Bloomberg and reported by Jeff Sommer, ‘[In late 2019] the median consensus on Wall Street was that the S&P 500 would rise 2.7 percent in the 2020 calendar year.’ That, of course, turned out to be dramatically low.

“A few months later, in April 2020, as the coronavirus stopped the global economy in its tracks, forecasters hit reset and issued another set of predictions. Per Sommer:

“‘They said the market would fall 11 percent. But the market had begun climbing on March 23, the day the Fed intervened to stem panic. The strategists failed to register the change in direction. If you had invested, based on their predictions, you would have missed a great bull market.’”

Jason Zweig of The Wall Street Journal had a similar conclusion:

“To me, the lesson of 2020 isn’t that a giant, unpredictable ‘black swan’ can wreak havoc with the best forecasts. Instead, the lesson is that whatever seems most obvious is least likely to happen.”

Zweig continues: “The only incontrovertible evidence that the past offers about the financial markets is that they will surprise us in the future. The corollary to this historical law is that the future will most brutally surprise those who are the most certain they understand it.”

• • •

“Uncertainty is the only certainty there is,” according to mathematician John Allen Paulos. “Knowing how to live with insecurity is the only security.”

We agree, at least about the certainty of it. As Vic wrote in response to the wildly unpredictable markets in Spring 2020: “Since no one can predict the future, uncertainty must be considered…”

We all experience life-altering black swans, whether personal or widely shared. So how, then, might we “live with insecurity,” at least from an investment perspective?

Our recommendation is the same now as it was in 2020:

“Review your portfolio to ensure that your asset allocation remains consistent with your goals, risk tolerance, and time horizon. If they’re aligned, stay the course. If they’re not – or if you fear they may not be – we can help you make thoughtful, deliberate modifications.”

In short, an appropriate asset allocation can and should offer you peace of mind – even in the event of a black swan.