22 March 2020
Perhaps the most famous black swan event was the Global Financial Crisis, which essentially stemmed from a collapse in domestic American house prices in the late 2000s…
People started defaulting on their home loans. One thing led to another and world economies took up to a decade to recover.
So, why are people talking about black swans again? Well, some people are wondering whether the Coronavirus might become another black swan event. When you stop and think about it, the idea that in this age of globalisation a virus will spread quickly around the world makes complete sense. But there is a concern that world financial markets have not ‘priced in’ the risk of a health event that makes it harder for people and things to move around the world. People have therefore been too optimistic and that optimism might mean that share markets are overpriced.
Only time will tell if this is the case. Basically, everything will depend on the extent to which the virus affects world economies. And no one has ever proven themselves very good at predicting things like that (except in hindsight!)
What we do know is that share prices go down quite often.
As professional advisers, this is something we never forget: markets move in both directions, up and down. Our advice is always to accept the key lesson of the black swan: rare things happen. More formally, this is known as ‘risk management’ and it is the key element of any successful investment plan.
AUTHOR : Andrew Ledingham | CATEGORY : Financial Services
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