In the financial world, “Black Swan Events” are unforeseen changes that have a profound impact.
The term ‘black swan event” has come into regular play in the world of finance since Nazim Taleb’s 2007 book, “The Black Swan; the impact of the highly improbable.”
Recognising the existence of “Black Swan Events” is profoundly important, and has significant implications on how we all should manage financial matters. In some ways, the lessons of Black Swan Events challenges much of the conventional wisdom of financial planning.
The conventional wisdom is centered around projections. Work out what your income needs are going to be, work out what different asset classes are likely to produce (often based on past performance), and put the portfolio together (always bearing risk in mind).
However, along comes some sudden, unforeseen change, and all the projections go out the window. Some examples include the GFC of 2007/08, and the recent changes to superannuation whereby the Government will limit the amount in pension funds to $1.6 million.
But, not all black swan events are bad. The Costello changes to superannuation in 2007/08, where he made all superannuation totally tax free after age 60, was one example of a “good” black swan event.
Currently, there is angst about as analysts scour the landscape looking for the next “black swan event”, and given the current negativity of just about everything, it is mainly “bad” black swan events they are looking for. But this also misses the point. If it is foreseeable, then it is not a black swan event, and is probably already priced in.
The existence of black swan events has implications for financial planning:
• Don’t lock into investments or legal arrangements that cannot be easily changed.
• Keep an eye on your investments, and be prepared to change if circumstances (legal, market, whatever…..) change.
• Bear in mind that there are usually ways to achieve your goals, but the ways may be different from what you originally thought. Stay flexible.