-Barbara W. Tuchman

I had a whole introduction ready for this article where I was going to talk about the expression; Black Swan. The history, Nassim Nicholas Taleb’s 2007 book of that name and how it came to be a phrase that meant an out of the ordinary event that you nonetheless have to account for because these “almost impossible” events happen more than you would like to think. I submitted this version of the article to Commonwealth for Compliance approval hoping I would get it back in time to send out on Tuesday, March 15^th for reasons that become obvious below. About 20 minutes later, a car drove through the front of our office, blowing through the window and walls and propelling Joanne’s desk, fortunately without Joanne sitting there, into the far wall. I can’t think of a better introduction for this newsletter about Black Swan events then that very real Black Swan that just happened to us earlier the day of this writing. In fact, I’m still waiting for the restoration company to secure the hole in the wall so I can go home for the evening. I wanted to talk about Black Swan events in this newsletter, of course, to discuss the Russian Invasion of Ukraine. As mentioned, I write these articles a week or so before they show up in your mailbox, therefore, it’s quite possible there has been developments in Ukraine that are not accounted for in what I’m discussing here. I also in no way want to diminish any loss of life by discussing something as trivial as how the stock markets are reacting –as important as those movements may be to all of our financial lives. With that said, this crisis is the latest in that aforementioned series of seemingly rare events, the Pandemic being of course the most notable.  

Exactly two years ago to the day, Schools were closed across Massachusetts as the first wave of the Pandemic hit. Markets started selling off a few weeks before, and actually hit their low on March 15, 2020. But if you had told investors that we’d still be dealing with Covid a full 24 months later they probably would have sold the markets off even more. This was a black swan event that was outside of any economic forecasting, even as it affected everything including the economy. Russia’s aggression against Ukraine is similar, in that it isn’t something we couldn’t have timed or forecast when thinking about what the market or the economy is going to do for 2022. Unlike the pandemic, and once again I in no way want to diminish loss of life, this crisis is really of nowhere near the scope. It doesn’t affect every economy in every corner of the world, assuming of course that it stays isolated in Eastern Europe and doesn’t expand into a wider crisis, or China doesn’t view it as a good time to encroach on Taiwan for example. But these “maybes” are why the markets reacted so strongly to something that may not affect the profits of major U.S. companies in the least. As a black swan event, how it manifests day to day, even hour to hour is totally unknown. Unknowns lead to risk aversion; risk aversion leads to selling and selling leads to declines – until something positive happens and the markets decide it’s time to go back up. I had several conversations along these lines with clients in late February through early April of 2020 and I remember saying many times, “the markets can go back up just as fast as they went down.” Of course, I was wrong, the selloff in the market from previous high to Covid low only took about a month – and then it took five whole months to get back to that previous high level. But while my exact timing was off, the message was correct. When these black swan events happen, the best course of action is usually to do nothing – except continue with regular rebalancing that should naturally be selling high and buying low in small amounts over time. As terrible as things may look in Eastern Europe and as justifiably nervous as you may be – we’ve seen worse things happen. Ultimately, the markets are going to react to economic forces in the long-term so as long as you are invested to your time horizon (don’t have the milk money in the stock market in other words) things should be okay.

These events also show the benefits of wide diversification. When the U.S. stock markets are going up like a rocket ship and nothing else seems to be doing much, as we saw from about April 2020 to mid-2021, it’s easy to wonder why you would own other assets. It’s during these unforeseen crises that the reasons become notable. While the recent sell-offs have been pretty broad, and affected both stock and bond markets, not everything is down. In a property diversified portfolio you are much more likely to have some asset classes that are responding positively even as perhaps the majority of your investments are suffering some losses. These investments serve three purposes; they give you somewhere to take money to put into those lower investments when the rebalancing time comes, they give you somewhere to take some money should your own life be hit by a black swan and some of your long-term money suddenly becomes short-term money, and they help prop up the overall value of the portfolio to help you sleep better at night. So far this year our allocations to gold, inflation protected bonds, and in some portfolios; natural resources – have helped in all three of those areas, even as those allocations wouldn’t have made much difference to your returns in 2021. Since you never know what’s going to happen, you need to be ready for almost anything – and diversification is the only way to accomplish that goal.   

So, I encourage you to hold on tight and stick to your long-term plans as this crisis plays itself out. As of this writing the actual downturn is far less severe than it was two years ago, and we came into it off a couple of historically good up years in the markets so you’re still “playing with house money” compared to where you were this time last year for example. If things in your life have changed, if you’ve been hit by a personal black swan event - like perhaps a car driving through your office- and we need to reconsider your allocations, please let us know. This may also be a time to create some tax losses, or rebalance some accounts with less taxable issues – much like we did for many clients back this month in 2020. If you get really worried, or have any questions we’re always here for you. Hoping for peace I’ll talk to you next month.