investment black swan

Survive the investment jungle's bulls, bears, rhinos and black swans

When it comes to investing, do we live in a world where bull nor bear beats black swan? 


  • 0:14: Should we expect more black swans?

    Phil Shaw: Well black swan events by their very definition are impossible, virtually impossible to predict. And if you lived your life and your investment principles were solely around avoiding black swan events, you’ll probably lose out on your market return. So, it’s always good to be mindful of left-field events such as an extreme black swan, but from a practical investment perspective, it’s a lot more logical to try and look at market turns and asset classes.

    John Haynes: I think we are a little too frightened of black swans and that sort of thing. I think having had two extremely profound financial resets in a decade – the tech reset and the financial crisis – of different natures, but they both effectively caught the world’s investment community napping. 

    I actually think that the world has reacted extremely well to the change in political direction and regime that populism has crystallised in Donald Trump and several changes in control in Europe, have demonstrated, I think if we’d had that ten years ago, we’d have had a much more profound reset of our risk appetite and equity markets particularly. 

    So, I’m very encouraged that actually our defences against black swans are quite high. We have a system where we are scanning the horizon for them in a way that we hadn’t done for far too long. So, we’re back to normal cycles but with an embedded risk premium that now rightly reflects an uncertain near-term political direction.

  • 2:12: The danger of raw data

    Chris Hills: I think that this is where raw data can be dangerous because raw data assumes that the future has the same pattern recognition as the past. And our job is to look at all the possible eventualities and try and say how can we protect, or insulate, mitigate the tail risks at either end of the spectrum – the implausibly bad or the implausibly good – how can we get some exposure to one end, and minimise exposure to the other end.

    So there was that famous example where an investment bank strategist said this would be a one in a 5,000-year event, but unfortunately, it occurred three times within two years. And you can’t rely on the past being a perfect guide to the future.

  • 3:12: The big five

    Annelise Peers: So, 2008 we all a massive black swan event and now in a way, we keep looking for the black swan behind every tree. I think the fact that we’re all waiting for it means that it probably won’t occur in the near term. I found a recent definition of a black swan: “A highly unlikely event with severe consequences”, but then there are two other animals, other than bulls and bears. There’s the elephant – that is something we talk about but do nothing about, and then there’s the rhino – a highly likely, but ignored event.

    So, I do think we’re in a different world, yes you will have the odd black swan event, but the markets are not confined to two more animals, I think we should expand it to five.

  • 4:02: Volatility is here to stay

    John Haynes: So, I wouldn’t say we’ve had more black swans and we need to be worried about it. I think we need to be prepared for greater volatility, but that’s just because we’ve had such low volatility for so long, it’s a natural progression to what people should be prepared to have. So, to anyone who owns equities now, who has not enjoyed the experience over the past year where things have got a bit more volatile, I would say to them then you’re not suited to equities, you need to sell your equities and go do something else for a living because this is here to stay.

Investors love predictability, certainty and bull markets. However, the global economy is presently characterised by bears and volatility. 

While these trends will likely persist for the foreseeable future, many investors are more concerned that the temperamental markets will lead to another incalculable event – a fabled black swan moment. 

We asked Investec Wealth & Investment’s Global Investment Strategy Group for their views on how to prepare for future black swans.

Bracing for the next black swan

Between 2000 and 2010, the global economy experienced two such events – the dot-com crash and the 2008-2009 sub-prime financial crisis. 

“As a consequence, markets remain acutely aware and frightened of black swans,” believes John Haynes, Head of Research and Chairman of the Global Investment Strategy Group, Investec Wealth & Investment.

These events caught the world’s investment community napping and many investors now expect that something similar is lurking around the corner. “Those of us who lived through both events have our antennae finely attuned to spot another unpleasant event on the horizon,” adds Haynes.

The problem is that by their very definition, black swan events are virtually impossible to predict, states Phil Shaw, Chief Economist at Investec UK.

These abrupt corrections wreak havoc on markets, leaving a wake of destruction in their aftermath. While a few investors were able to spot these black swan events and realise exponential returns, most of the market dreads the possibility.  


“However, we can't base investment decisions solely around avoiding black swan events because the opportunity cost is too great – overly cautious investors would lose out on significant market returns. While it's prudent to be mindful of left-field events, a more logical approach is to identify and leverage the factors that precede bull and bear market turns,” adds Shaw.

How do investors prepare for a future they can't predict?


  • 0:12: Volatility can be your friend

    Ryan Friedman: There’s always going to be volatility implicit in anything you do really, and the same applies to investments. Within the context of investments, they are more volatile the higher the prospective returns, so for example equities promises you a higher return, and therefore the volatility associated with that particular asset class will be higher than cash for example.

    What is very important in understanding volatility and managing investments is a long-term perspective. Volatility can be your friend if you have a long-term perspective. Volatility can be a nightmare or very scary if your time horizon is very short. Therefore, having a long-term perspective when managing money or investing money, one has the ability to actually utilise volatility as an opportunity and not a potential cost to the portfolio.

  • 01:08: Expertise can help you manage volatility

    Phil Shaw: Well if the future was really easy to predict, we wouldn’t be doing the jobs we do – you wouldn’t need professionals or experts. Hopefully what the expertise brings to you is some more clues, so that you can predict the future better than other people and that’s where the value add is. No one pretends that an investment professional can get everything right, that’s just never going to happen. But if you can spot big changes in the markets, then you’re adding value, you’re helping to preserve and enhance peoples’ wealth.

  • 01:53: Following the herd

    Phil Shaw: It is important to know what the herd is doing, where the momentum is, you don’t want for example to invest in a market that’s necessarily falling heavily. Sometimes you’re trying to dodge raindrops going from A to B, but at the same time it’s important to recognise whether you think there’s value in a particular asset class or a specific market so that when momentum might be turning, that’s the point where you say right, this is where we’re going to start investing in that particular asset class.

Applying an analytical lens to market data

This requires experience, a keen eye for indicators and, increasingly, the ability to analyse data. However, this raises other concerns, says Chris Hills, Chief Investment Officer, Investec Wealth & Investment UK.

“Relying too heavily on raw data can be dangerous because this approach assumes that the future will follow the same pattern as the past. An investment manager's job is, therefore, to look at all the possible eventualities to make an accurate prediction that protects, insulates or mitigates the risk to investors' funds across a range of possible outcomes, without sacrificing potential returns.” 

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Beware the investment jungle

Annelise Peers, Chief Investment Officer at Investec Wealth & Investment Switzerland, describes a black swan as a highly unlikely event with potentially severe consequences. 

“But often, other more sinister animals lurk beyond the swans, bulls, and bears. There are two other investment market 'animals' that investors should consider, namely the elephant – something that is often discussed but no action is ever taken about it – and the grey rhino, which is a highly likely yet ignored event.” 

In her book titled Gray Rhino by Michelle Walker, the author identifies four kinds of grey rhino events: the charging rhino, something you need to deal with right away; the recurring rhino, which refers to cyclical periodic threat such as inflation or interest rate hikes; a meta-rhino, which is the most dangerous because existing structural issues are not addressed, such as rising debt levels; and the unidentified grey rhino. 

“As such, investors must be aware of the broader risk and threat profile that exists in today's global environment,” suggests Peers.

While Haynes believes that defences against black swans have improved and we now have systems in place to scan the horizon for them, investors must remain vigilant. “We’re back to normal cycles, but with an embedded risk premium that rightly reflects our uncertain near-term political direction.” So, tread carefully!