The recent financial events of 2008 have caused many investors to be aware of the potential to expect the unexpected. Over the course of any major market cycle, a long term investor is likely to experience some kind of event that has the potential to provide extreme gains or extreme losses. In 2007, a gentleman by the name of Nassim Nicholas Taleb coined the phrase, “Black Swan Theory.” This referred to unexpected events of great magnitude that have the potential to play a prominent role in history.
Over the course of major cycles those who plan for these unexpected events often only do so as a hedge against other portions of their portfolios. This strategy is usually preferred because those who consistently do it tend to lose money because the events have such a low probability of happening. Every now and then you always read the stories of those lucky few who bet big on that rare event and actually are proven right. The most recent example of that happening would be the subprime housing crisis. They often say it only takes one trade to make an investors legacy.
The degree to which individuals plan for these events should be taken in the context of one’s own financial planning circumstances. It is always important to consult with your financial advisor to decide if planning for one of these “rare events” makes sense or not.
Past performance does not guarantee future results.
JPT090111-1363
