An financial or investment plan established during less volatile times should not be abandoned in the midst of a market downturn caused by a “black swan” event.
The Black Swan is a conceptual framework for thinking about potential risks that were both highly destructive and low probability. Author, investor and mathematician Nassim Nicholas Taleb, in his 2007 book about unpredictable events, “The Black Swan”, defines:
- It is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.
- It carries an extreme ‘impact.’
- Human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
Pandemic
The novel coronavirus (COVID-19) pandemic is an unprecedented challenge for Americans and continues to be a central focus around the world. It has had material implications for the economy, fiscal and monetary policy, and global financial markets.
The impact on equity markets thus far has been notable, with the U.S. equity market exhibiting unprecedented volatility than in recent years. These reduced valuations and market swings can present challenges for investors who are investing with
purpose, like those saving for retirement. However, this kind of volatility should not be unexpected.Market downturns are simply part of the saving, investing and accumulating wealth experience. During any 20-year period, the stock market typically will suffer at least three (considered a drop of 10%) and at least one bear market (a drop of 20%).
Stay the course
It is important to stick with an investment strategy to avoid volatility during these downturns. In the wake of the 2008 financial crisis, an estimated 10% of investors liquidated their entire accounts, with 20% switching to less risky assets. These individuals, unfortunately, mistimed the market rebound and subsequent robust economic recovery. As a result, they were left worse off than if they had maintained a long-term view and stayed the course.