Morgan Stanley
  • Ideas
  • Mar 31, 2020

Portfolio Positioning Implications of Black Swan Events

While black swan events are, by definition, difficult to predict in advance, they nonetheless present important portfolio positioning implications when they arise.

The black swan metaphor is used to refer to events that are generally considered unimaginable – that just don’t fit within standard wisdom. It originates from the discovery of black swans by explorers in the late 1600s. Prior to that point, people from the northern hemisphere universally accepted swans to be white since that was the only colour they had ever encountered. It was unimaginable that there could be such a thing as a black swan.

In finance, black swan events are unexpected developments that have extreme impacts on markets. The global financial crisis of 2008-09 would be an example, as would the September 11 terrorist attacks in 2001 and the oil embargo of 1973. Most relevantly, our current experience with the coronavirus (COVID-19) would also fall into this category. A virus unknown six months ago is changing lives across the globe.

While black swan events are, by definition, difficult to predict in advance, they nonetheless present important portfolio positioning implications when they arise.

Short term crisis

The rapid spread of the coronavirus around the world has caused a huge spike in volatility. Financial markets have fallen rapidly and it’s possible they may fall further. Outside of markets, the real world impacts are beginning to be felt. Significant numbers of people have been laid off from their jobs – some temporarily and some permanently – while businesses struggle to cope with the new trading environment.

Governments and central banks around the world have stepped in to address the challenges facing economies and markets. Interest rates have been reduced to emergency levels and stimulus packages among the biggest ever conceived are being announced. Both banks and governments are pursuing creative strategies to protect economies from the worst of the crisis.

The interplay of these positive and negative influences will be critical to determining the path of the current crisis and the eventual recovery of markets.

Long-term opportunity?

There have been many black swan events in history and their impacts on markets have varied widely. Some were short and sharp. Others took much longer to fully play out. Importantly, markets have always recovered – even from the most serious dislocations. Most commentators expect markets will also recover from this crisis but the path of that recovery is impossible to know. No two crises are ever the same, so it’s uncertain how far markets will decline and how quickly they will recover lost ground.

Strategic asset allocation and tactical asset allocation tilts are specifically designed to address uncertainty in investment markets. Diversification is designed to smooth returns over the long term and reduce the impact of extreme market movements. Tactical tilts are designed to lean against unsustainable imbalances – to allow you to position yourself defensively when required and then move to a more aggressive stance when that makes sense.

Speak to your financial adviser about sensible strategies to shepherd your portfolio through these volatile markets. They can talk to you about the importance of tactical asset allocation and how to position your portfolio for the months ahead and for the recovery that is likely to follow. At times like this, it’s vital to have access to quality information. Experienced and knowledgeable commentary and advice can help you tune out the noise and follow a carefully planned strategy.


Plus, more Ideas from Morgan Stanley's thought leaders.