Investors, economists, and analysts usually do not account for such events in their models. They do not assume that something like this could happen right now, on such a scale, with such consequences. After the fact, however, everyone tries to explain them and often concludes that "it was obvious." We call such events black swans.
What are black swans?
The concept of the black swan was popularized by Nassim Nicholas Taleb, a Lebanese‑American mathematician, statistician, investor, and author of the book "The Black Swan." Taleb defined a black swan as an event that combines three characteristics.
First, it is an unpredictable deviation from regular expectations. In other words, most people do not take it seriously beforehand or do not even consider it. Second, it has a huge impact on reality. It can change the economy, financial markets, politics, technology, or the daily lives of millions of people. Third, after the fact it seems obvious. Once it happens, explanations appear as to why "it had to happen."
Taleb emphasizes that such events shape history, the economy, and social life more than economists or analysts would admit. The problem is that the world does not always develop linearly and according to forecasts. Sometimes one event is enough to change the entire picture of reality.
Examples of black swans
An example of a black swan is the outbreak of World War I. Today we can identify many causes of this conflict, but the scale of the catastrophe was a huge shock to the world at the time. Europe was strongly economically interconnected, and many observers did not anticipate a war of such scale and consequences.
A frequently cited example is also the 9/11 attacks of 2001. For financial markets, security policy, aviation, and international relations it was a shock whose effects we still feel today.
From an investor’s perspective, another good example is Black Monday, October 19, 1987. On that day the Dow Jones fell more than 22% in one day. It was the largest one‑day percentage drop of the Dow Jones Industrial Average in history. Black Monday showed that sometimes years of risk can materialize in a few hours.
A black swan does not have to be negative. It can be a disaster, but it can also be a breakthrough that suddenly creates enormous value.
A positive example is the Internet. From today’s perspective its importance seems obvious, but before the fact it was hard to predict that one technology would change trade, media, banking, communication, advertising, politics, and the way billions of people work.
The same was true for the personal computer. Today it sounds banal, but for a long time it was not obvious that the computer would end up in homes, desks, schools, and ultimately in users’ pockets in the form of a smartphone.
Where did the term come from?
The metaphor of the black swan has roots much older than capital markets. For centuries in Europe it was believed that all swans were white. The breakthrough came in 1697 when Dutch explorer Willem de Vlamingh encountered black swans in Australia. One observation was enough to refute the prevailing belief.
Taleb turned the story of the bird into a tale about the limits of human reasoning. The fact that something had never happened before does not mean it will never happen in the future. Sometimes one new phenomenon is enough to shatter an apparently stable system.
Can black swans be predicted?
Sticking to Taleb’s definition, the answer is no. A true black swan cannot be predicted. If it could be captured in a model, priced, and widely included in forecasts, it would not be a black swan.
That does not mean the investor is completely helpless. While we cannot predict a specific black swan, we can assess system fragility to some extent. We do not know what will trigger the next crisis. It could be the collapse of a large financial institution, infrastructure failure, a technological breakthrough, a cyberattack, a geopolitical conflict, or a sudden regulatory change.
We can, however, notice that the system is vulnerable to shocks. This vulnerability is increased by high debt, excessive concentration, high financial leverage, lack of liquidity, or dependence on a single market, sector, or supplier.
One thing is certain. Today we do not know what will trigger the next crisis or bear market. After the fact, many people may feel that everything was obvious. Analyses, comments, and data will appear showing that "it had to happen." That post‑hoc rationalization is one of the key features of a black swan.
A good example is the COVID‑19 pandemic, which many considered a black swan, although Taleb himself argued that the risk of a global pandemic was known and could have been anticipated. The question is whether he fell into his own trap by claiming the event was predictable after the fact.
How to prepare for the appearance of black swans?
It is worth starting with the fact that we do not prepare for one specific event. We prepare for unknown shocks that will sooner or later occur. That is why it is worth building a portfolio in a way that one event does not destroy the entire financial plan.
The first element is mental preparation. One of the biggest enemies of an investor is his own emotions and impulsive decisions made under panic or euphoria. It is useful to be aware that financial markets are volatile and that larger drops happen from time to time. If we are mentally ready for our portfolio to fall 20‑30% or more, it will be easier to survive such a period without rash decisions.
A ready action plan also helps. For example, an investor might pre‑decide that if the market falls more than 20%, he will not sell assets but will stick to the strategy or even increase engagement in equities. For a long‑term investor, deep declines can be an opportunity, although buying in panic is never easy. In such moments we must act contrarianly because the market is full of fear, and financial media talk about crashes, recessions, and the end of the world.
It is worth remembering that the U.S. equity market, if we look at the history of the S&P 500, has recovered from every crisis, even though investors had to face deep troughs along the way.
Another important issue is portfolio diversification, i.e., spreading risk across different asset classes, regions, currencies, and sectors. If the entire portfolio is concentrated in one market or sector, such as technology, a black swan hitting that area can especially hurt the investor’s results.
Regular investing is also helpful. It removes the pressure of picking the perfect entry point. Waiting for dips seems intuitively attractive, but in practice attempts to time the market are extremely difficult. By investing regularly, both in up and down markets, we average the purchase price and make short‑term market swings easier to endure.
A very important factor is also a financial safety cushion. Its absence can cause an investor to sell shares at the worst possible moment, i.e., after sharp discounts, in the event of a negative black swan. A safety cushion gives time, calm, and greater freedom to act.
The next element is rebalancing. Regularly restoring target portfolio proportions helps avoid a situation where, after several years of a bull market, the portfolio becomes far riskier than originally intended. Rebalancing does not eliminate investment risk, but it helps keep it at a level consistent with the plan.
These are the principles we follow at Portu. At Portu we enable investing in portfolios tailored to the investor’s profile, built from ETFs and covering thousands of stocks and bonds from around the world. This approach does not protect against black swans, but it helps avoid a situation where the entire investment outcome depends on one company, one sector, or one market scenario.
Summary
Black swans have been, are, and will be part of financial markets. They cannot be predicted, nor can we know their character, but we can prepare for them mentally and investment‑wise. The key is not to assume only one scenario and not to build a portfolio in a way that the entire outcome depends on one company, one sector, or one market.
That is why diversification, regular investing, and sticking to the plan even when panic arises are so important. For investors who want to build such a portfolio simply, the solution may be the Portu investment platform, where the entire investment process can be fully automated – from portfolio selection to regular investing and rebalancing.
