You may have heard the term ‘black swan’ in reference to financial matters.
A black swan is an unpredictable event which has a huge impact, and with the benefit of hindsight, is painted as an entirely logical event.
The global financial crisis, which originated in the US with the housing bust, before quickly spreading around the world has been described as a black swan.
But was it really a black swan?
Given more than one person predicted the event, it’s up for debate.
One of the more prominent was Peter Schiff, of investment firm Euro Pacific Capital. Schiff was long warning that house prices were overvalued, lending standards were nonexistent, the private citizen had too much debt and it could only end in collapse – taking the financial system with it.
He was right. So given his awareness, maybe another description is needed?
The term ‘predictable surprise’ was coined by Harvard professors, Max Bazerman and Michael Watkins, and seems more appropriate in describing the financial crisis.
A predictable surprise is a problem that at least some people are aware of, the problem intensifies over time and eventually the problem explodes into a crisis, much to the shock of decision makers.
Yet people like Peter Schiff were not shocked at all.
Unfortunately, Schiff had been talking about an impending crisis for several years before it happened. Which illustrates, while analysis can highlight the potential for problems, it’s impossible to pinpoint the moment those problems will become reality.
Be it a black swan or a predictable surprise, timing your investing to avoid crisis is almost impossible to do. While sitting on the sidelines, year on year, waiting for disaster to pass is no investment strategy either.
A black swan or predictable surprise is part of the risk of investing and only genuine diversification can help minimise that risk.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you’d like help with your financial future, we might be Australia’s best financial advisor.
