It is always amusing to see articles and television spots predicting black swan events; they are by definition unpredictable. To try to see them coming is pointless. In the financial world, the big event on the horizon is the Federal Reserve raising interest rates, and there has been much debate about when (if?) this will occur. This is an important issue; however, I would guess what the Fed does will not be the big event of the decade. Rather, the most significant event will be something no one will see coming - a true black swan.
Morgan Housel has a great article entitled “You Would Have Never Believed It” where he writes examples of the unpredictability of the future. A few excerpts:
“You would have never believed it if, in 2004, someone told you a website run by a 19-year-old college dropout on which you look at pictures of your friends would be worth nearly a quarter-trillion dollars in less than a decade. (Nice job, Facebook.)”
“You would never have believed it if, in 1900, as your horse and buggy got stuck in the mud, someone pointed to the moon and said, ‘We'll be walking on that during our lifetime.’”
“You would have never believed it if, three years ago, someone told you that Uber, an app connecting you with a stranger in a Honda Civic, would be worth almost as much as General Motors.”
“You would have never believed it if, after the lessons of World War I, someone told you there'd be an even bigger war 25 years later.”
Housel concludes the article with this:
“But all of that stuff happened. And they were some of the most important stories of the last 100 years. The next 100 years will be the same.”
Research has shown that we tend to overestimate changes in the short-term and underestimate changes in the long-term. To try to forecast or predict bubbles, black swan events, and major world events is useless. To change your investment strategy in response to these predictions is even more foolish.
Josh Brown notes the following regarding this:
“[Mark] Hulbert had made the point that no one will see the thing coming that derails the economy or the market next time around. It certainly won’t be something that’s on the front page of the newspaper each day like Greece or interest rates. I would add in that we still cannot pinpoint the events that have marked previous market tops even in hindsight.”
While it is important to monitor the economy and geopolitical environment, trying to predict the unpredictable is a losing effort. Financial planning consists of making assumptions: assumptions about rates of return, assumptions about health, assumptions about legislation, assumptions about inflation, assumptions about family, etc. Chances are these assumptions will not be spot on. Despite this, all plans, financial and otherwise, rely on assumptions. This is why it is important to have an emergency fund, power of attorney, and insurance in case your assumptions aren’t as accurate as you would have hoped.
Robo-advisors and the Fed raising interest rates are two examples of developments with consequences still to be determined. Many are predicting they will have a large impact on the investment and financial planning landscape, which they probably will. That being said, as Justin Frankel wrote two weeks ago, “Don’t let the noise about Fed moves disrupt an otherwise well thought out investment process.” He continues: “The anticipation and subsequent parsing of Janet Yellen’s testimony and other assorted speeches from Fed officials last month was (rightly or wrongly) often cited as the cause for market moves, but in reality any Fed-related anxiety has likely been overplayed by the media.”
While both the Fed raising rates and the emergence of robo-advisors may or may not be disruptive, they are not black swan events. It is far more likely some unforeseen event has a greater impact on the investment and financial planning industry. Point being, quasi-black swans can be important but will likely not be as significant as the true black swan events that no one sees coming.