Money Matters - Markets and Black Swan events

With the market seemingly in free fall once again and for the second time in two years (the first one being fall of 2018) investors must be wringing their hands in frustration. Although the spring and summer of 2018 saw healthy market returns, the fall of 2018 may have wiped them clean. Enter spring 2019 and with a few minor hiccups, investors once again likely saw green in their portfolio balances. 2020 started normal enough. If you can all a Dow new high normal. But the markets are susceptible to what is called Black Swan events. Events that come out of the blue and are rare and unpredictable. An alien invasion would certainly qualify as a Black Swan event as would a Tsunami, 9/11 and a host of other imaginable events.


Enter the Corona virus, officially named Covid-19. Out of the blue and creeping stealthily unnoticed at the onset, it has exploded onto the world social and economic stage as a credible threat not only to life and limb but to the global economy as well. Not since the economic implosion of 2008/9 has the world witnessed an event that could have dire effects that span the globe.


Pandemics strike to the very core of human frailties and subsequently their fears. Few events can immobilize populations like the fear of catching a deadly contagion. Economically speaking, when people stop moving, so do the economies they support, which is to say every economy where the contagion exists or migrate to.

Unlike one off events that end the same day they start, like a terror attack or natural calamity, a pandemic ends is unknown, and as such, so is its economic effects. It is said markets hate uncertainty. A pandemic certainly is the anthesis of uncertainty.


During the historic market fall Corona has caused, investors likely fall victim to what I call the “Headi Mind Trick”. Taking a spin from the Star Wars movies on “JEDI mind trick”, the Headi mind trick can also alter a previous thought, plan or mindset like the JEDI mind trick does.


Although investors think they can weather losses and market falls when all is well, the mind plays tricks on investors and advisors alike. Simply put, where resolve to stay the course in market falls once was, the imagination wonders to the “what ifs” that were thought to be reasoned out in one’s mind beforehand. Although temporary market set backs are well handled, continued market falls and or sudden and wicked plunges, such as the one just witnessed, opens up the minds imagination to dark places. Thought of losing it all, what if it doesn’t stop, how much have I lost and how much of my gains did I give back occupy the recesses of the brain where once calm and reasoning once resided. No matter how prepared we are, the mind can fall victim to the trick.


And one could argue rightly so. Where reasoning once dwelled, the fact of the matter is although markets historically always recover, who’s to say the next time won’t be different, won’t stop and actually wipe out a good portion or even all of one’s hard earned savings?


Although conventional wisdom would say otherwise, and I myself doubt anyone’s entire portfolio could go to zero, there is no guarantee it won’t happen.  More likely than a complete collapse to zero which in my opinion has next to zero chance of happening, is a bad enough wipe out to severely damage portfolio balances. The word “severely” being the key here. From years of handling investor fears and in talking with them over a wide variety of stock market gyrations, few investors could neither stomach nor recover from a 60-80% wipe out. The thought of losses of that magnitude is unthinkable but who is to say it can’t happen?


Since the ramifications of a financial setback of that degree would be devastating to say the least, to not have a plan for it could be said to be naïve. Although we hope for the best, we can prepare for the worst, and since the worst case would be a devastating and life altering set back, at least considering a plan of action would be prudent for all investors.


It could be a simple as setting a certain percentage as the line in the sand. If you lose this much, you are out, period, end of story.


Although few investors have such a plan, considering the ramifications of this “what if” scenario of a massive wipe out, perhaps at least discussing it should be considered. After all should a massive market crash occur, you can be certain the Headi Mind Trick will certainly materialize at some point.


Much like a medical directive, such a discussion may be difficult and have little chance of being enacted, but it is suggested we do it none the less.


Do you have a plan for a possible devastating fall in the markets?


Although the possibility may be remote, the ramifications are simply too dire to ignore.


This article expresses the opinions of Marc Cuniberti and should not be construed to act the part is individual investment advice. No one can predict market movements. Investing involves risk. You can’t lose money. Mr. Cuniberti is an investment advisor representative through Cambridge investor research visors Inc. a registered investment advisor or can be contacted at SMC WEALTH MANAGEMENT, 164 Maple St. Number one, Auburn, CA 95603 530-559-1214 SMC and Cambridge are not affiliated his website is WWW Money Matters California insurance license 0L34249