By The Advocates
Once, while working from my home, I realized I hadn’t gotten up in a long while. I got up, stretched, and made my way to the kitchen for a refill of my water jug. I noticed the light in hall bath was left on. Shaking my head, I opened the door to flip the switch and a wall of bubbles smacked me in the face.
I stood in disbelief as the wall slowly tumbled forward, encroaching on my wood floors. I snapped into action, grabbed some beach towels, and began deflating bubbles and mopping in quick succession.
My daughters had filled the toilet with soap, and I can only assume, flushed with mad abandon. I didn’t know that could happen if you put soap in the toilet. I certainly never thought to make a rule banning toilet-soap experiments. Yes, ladies and gentlemen, it was a black swan event in my very own home.
I use that term all the time when my kids do something jaw-droppingly random, but its normal use is in finance, and it’s meant to describe truly wild market events. A black swan event is unpredictable, unprecedented, and highly improbable; it has a huge impact, and it causes the market’s armchair quarterbacks to come out in record numbers. The recent pandemic is an apt example.
Legend says that black swan events are named after a 17th century English belief that all swans were white. When a Dutch explorer found black swans in Western Australia in 1697, the theory was disproven. It’s a novel story that describes an underlying human tendency to make inductive inferences. Very simply put, people try to predict the future based on their observations of the past.
It seems only natural to do so, people work with what they have. But it doesn’t matter how many times you’ve seen the same scenario play out, there is no guarantee that it will continue to play out that way. An interesting way to reflect on this is to look at predictive musings of people from ages past, like these illustrations of the year 2000, made by people living in the Victorian era.
They clearly anticipated some technological advances (I particularly love the postcard with the voice dictation machine using a gramophone), but other aspects of society seem frozen in time. The result is a laughable juxtaposition of Victorian aesthetics and Suess-like devices.
Its amusing, but we shouldn’t mock them. Many of the black swans that flew between their time and ours were technological birds, so to speak. Surely, they would see our world as magical (and potentially terrifying).
Guess what? We’re the future’s Victorians, and we can’t see our black swans coming anymore than they could. Knowing that, should you bother to anticipate them? Kind of. We still believe that we all have to face and accept that we can’t prevent all negative outcomes, but it doesn’t follow that we shouldn’t bother to prepare to the degree we can.
We’re always going to encourage our clients to ignore predictions and focus on data, and that makes us fans of the controllable classics: substantial savings, diversification, and monitoring/rebalancing. And of course, accurately evaluating your tolerance for market volatility helps us determine how much of a defensive posture you need to assume in the first place.
But at the end of the day, if the sky is falling, no one’s going to be worried with rebalancing their portfolio. That’s why we keep pointing back to your vision and values as the focal point of your financial life.
A good way to find out what they are for you is to imagine where you would go and what you would do if the sky tumbled toward the earth. Those are the things you really care about, and your values are the reasons you care.
We can help you make a plan that supports the things that matter to you. We’re ready when you are.