Black Swan Events & Coronavirus
Black Swan Events
Following the recent market volatility brought about because of the COVID-19 outbreak and today’s collapsing Oil price, we thought it apt to discuss Black Swan events.
A Black Swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black Swan events are characterised by their extreme rarity and their severe impact.
The term Black Swan was popularised by Nassim Taleb, a finance professor and former Wall Street trader. Taleb’s 2007 book, The Black Swan, gave investors a conceptual framework for thinking about the potential risk that were both highly destructive and low probability. The events of the 2008 Financial Crisis certainly met Taleb’s narrative, particularly when you consider that many believe the Financial Crisis was predictable, in hindsight.
Other examples of Black Swan events in financial markets include ‘Black Monday’ of 1987 and the failure Long-Term Capital Management (LTCM) in 1998 following the emerging market debt crisis. Outside of financial markets, Black Swan events include the Spanish Flu of 1918 which killed up to 50 million people, the dissolution of the Soviet Union and the September 2011 attacks.
Given the rarity of such events and their unpredictable nature, managing the risk of these events is difficult at best. However, what we can do is to build robustness against negative events whilst still looking to take advantage of positive events. Our ‘all-weather’ approach to investment, that holds a range of assets and aims to diversity how returns are achieved will see us through these volatile events. The ‘all-weather’ approach includes –
- Reasonable allocations to Cash.
- Fixed Interest allocations to Index Linked Gilts and US Treasury Inflation Protected Securities (TIPS).
- Multi-Asset Funds which have a strong long-term track record across different market conditions.
- Themes ranging from Gold to Hedge Funds.
Given the emerging situation with COVID-19 (Coronavirus), our Regulator the Financial Conduct Authority (FCA), require us to have in place plans on how Financial Planning Wales would react if impacted by the virus.
Our priority remains the safety of our staff and clients, and we have systems in place to ensure continuity and to minimise any business or service disruption. These are as follows:
- All staff have full capabilities to work remotely
- We are capable of hosting face to face meetings via the internet/phone
- Depending on developments we will restrict internal travel to essential only
We have received details from the service providers that we use as to how they will deal with the situation as it develops, and we expect to be able to continue to work as normal.