A “black swan” is a completely unanticipated event which, usually, has a resoundingly negative impact on the economy. These events take everyone by surprise, even the smart folks who spend their days constantly analyzing, monitoring, and crunching the financial numbers. Forecasting out the short and long term ramifications of black swans can be a nearly impossible task. The only predictable thing? They do happen. How they arise, what occurs in the aftermath, and what we learn in hindsight is anyone’s guess.
The most recent black swan event was the collapse of the subprime mortgage market that turned into the 2008 financial crisis. We are arguably in the midst of another one now with the COVID-19 pandemic. The silver lining in all the economic turmoil? These events push people to rethink how they feel about their money and investing as a whole. They serve as important teaching moments in a lifetime of financial education.
Here are the four biggest lessons to be learned:
The unpredictable is…unpredictable. What the stock market is going to do on any given day is always a question. The well-kept secret in the investing world is that nobody can say with absolute certainty what is going to happen. When you add in a black swan, like a global pandemic, the unpredictability of the stock market is ratcheted up even more. You cannot as an investor know for certain what the market is going to do moving forward, or when the next black swan will rear its head. What you can do is stay the course with consistent saving and investing, while keeping your lifestyle at a manageable level.
Understand your risk tolerance. Risk tolerance is your ability, or inability, to handle the ups and downs of the stock market. Your tolerance for risk changes over time and depends on your current circumstances. As an investor, pulling back your frame of reference and looking at the bigger picture is almost always beneficial. Check in on your overall risk tolerance on a regular basis. Investors often don’t realize where their comfort level truly lies until they have suffered through a severe recession triggered by a black swan event. If you’re feeling out of sorts with your investments right now, take our free risk assessment and find out where you stand.
Learn from investing mistakes. If you are like many people, you may be hurting financially right now. Don’t beat yourself up if you lost money when the market bottomed. Don’t beat yourself up if you now feel like you should have bought back in. Learn from any mistakes you have made and plot your path forward. Find confidence in your ability to succeed in the long term, even if the day-to-day numbers may not look as rosy as you would like.
Your financial plan is constantly evolving. A key aspect of black swans in the economy is that they have a huge impact on a vast array of people. The COVID-19 pandemic has caused shocking change in the daily lives of Americans: job losses, furloughs, spending cuts, lifestyle modifications from social distancing and government mandated closures, to name a few. Has your life been completely turned upside down in 2020? Take a little time to check your financial plan. Even though it may have been on track at the beginning of the year, tweaks and possibly a complete overhaul may be necessary now. Your financial plan isn’t intended to be a static document you file away somewhere. If you haven’t taken a look at it lately, now is an excellent time to update any aged data and reconfigure as needed.
A black swan event can leave people feeling financially helpless and unsure of themselves. If you fall into that category, it’s completely understandable. Be sure to take steps to get back on track, even if just a little at a time. We are here to offer guidance or advice along the way. Don’t hesitate to reach out if we can be of any assistance.