The Infamous Black Swan
I have often heard people use the phrase “black swan” for unlikely events but wasn’t always clear on what it meant. Then, I discovered the origin. As the story goes, the English had never seen a black swan until they traveled to Australia. At first it shocked them, not only because it was different and rare, it was beyond anything they’d imagined was possible. They had no idea it was even a possibility, which is why black swan events have come to describe rare and unanticipated events. Events we didn’t know were a possibility because we’ve never experienced them before. So, what does this have to do with investing? Think back to our meetings when we discussed historic US stock market returns of 7-10% per year and how on only a couple of occasions the market has ever yielded a negative return over a 10 year period. Never before has the US stock market had a negative return over a 20 year period. But does it mean that scenario isn’t possible? Of course not. The reality is the market could have a negative return over a 20 or even 30 year period, and that would be our black swan event. I wouldn’t say it’s likely but it certainly is possible.
Even if we don’t have negative returns over the next 20 years, many in the financial community are predicting 5-7% rates of return going forward instead of the historic 7-10%. This would have enormous implications for the growth of our portfolios into retirement and is a very real possibility. On top of that, with the Federal Reserve keeping interest rates near 0% as long as they have, many are also predicting rampant inflation that would eat away at our purchasing power. Piled on top of this we know that our Social Security benefits (as well as Medicare and Medicaid) are on an unsustainable path that will likely require a reduction in benefits or a delayed eligibility age for many of our younger clients. All of that said, we couldn’t be more optimistic for the future.
Yes, it’s true that many potential factors are working against the projections we hope for and the future values of our portfolios, we can’t help but look forward. What we’re looking at is the unimaginable increases in the general standard of living that will take place in our lifetimes. It’s similar to how even the middle class today almost unquestionably live more comfortable lives than the Rockefellers or Vanderbilts did back in their day. This is simply due to advances in
medicine, technology, and the general standard of living.
George Washington died after hours of “bloodletting” that removed 40% of the blood in his entire body. A common medical practice at the time! However, today one can look at a mid-level automobile to see the same phenomenon. Today’s Honda boasts the same features that were exclusive to the highest end luxury brands only a few years ago. All of this illustrates our unwavering belief that things do, and will continue, to get better.
Working together, we’ve run through portfolio predictions based on very sound financial
principles, but even if those projections don’t materialize to even half of what we would
expect, we believe that the future is bright. As long as we do our part and go about our finances in a calculated, disciplined manner, controlling what we can, we will get there. Inevitably, time always brings change and hope.