Protecting Your Portfolio against Black Swans

CENTRAL DISTRICT, Hong Kong - July 17, 2016 - PRLog -- Post the spectacular stock markets booms of the 1980' and 1990's, the investor thought that they could do no wrong. However the terrible events of 11^th September 2001, stirred everyone from their complacency. People realized that forces external to the market present a much larger risk than the intrinsic dynamics of the market.

Wealth Alliance refer to these as "Macro Events," and ever since 9/11, it appears to all intents and purposes that the markets have developed some kind of antipathy to shocks to the economy globally leading to wild swinging movements in the markets ever since. What makes these all increasingly unsettling and challenging for investors is the inherent uncertainty of macro events which are not measurable in terms of potential risk.

Our Definition of Macro Events

Failures of markets and national economies (Greece, the Chinese currency devaluations of 2015 or the European Debt Crisis) to name a few, geopolitical shocks (Arab Spring), natural disasters (Hurricane Katrina) and acts of terrorism (9/11). These are all macro events that occurred with and without prior warning, which in all cases had far reaching global ramifications.

The more improbable and less-expected the events are, the more damaging and dangerous they tend to be. These are referred to as "Black Swan" events, this is a reference to the rarity of black colored swans. Due to the nature of these they were traditionally never factored into asset allocation strategies or investment models or in fact the mindset of investors. Thus when they do happen, their impact on the markets globally can be overwhelming.

Historically we may have experienced a black swan once in a blue moon, however they appear to be happening with increasing frequency. It seems a week does not go by without some form of atrocity or natural disaster, such as the financial meltdown of 2008-2009 or the Japanese Tsunami and subsequent nuclear disaster, these are all classed as black swans. This increased rate of ornithology has had a paralyzing impact on investors who have become fearful of when and where the next occurrence will happen.

What to Do?

With the uncertainty of macro events in mind the preparation of your portfolio is not as challenging as you may think however if you are an investor that has strayed away from the simple fundamentals of a long-term investment plan then you may well find this challenging.

To start you have to have the correct mind-set having the propensity to maintain perspective and keeping your fears in check. A great example is Warren Buffet, considered by many as the greatest investor of all time. He has made billions of dollars through preying on the fears of investors, purchasing while the masses are selling. In the 1994 Berkshire Hathaway shareholder letter he wrote

"Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist…"

"A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results."

In today's age of connectivity 24/7/365 the world has become deafening. The key is to stop listening to everybody else; the people in the pub, social media, the pundits and gurus. Keep in the forefront of your mind that all this noise has very little to do with your personal goals and objectives. Herd mentality drives the markets as much as they are by fundamentals, yet these are rarely in synergy.

With this in mind your gut is likely to be correct more frequently than any market forecaster. You may be sat on the fence and trust neither, therefore you may consider employing the services of your local plumber to give you advice on your portfolio since it cannot get any worse, can it? Your best course of action is to set a rigid strategy that is centred on your investment priorities, preferences, objectives and tolerance to risk since they are the only benchmarks that really matter.

In Summary

If you have a problem with your car, you go to a mechanic. You have an issue with your electrics you call an electrician. If you are like most of our clients and barely have enough time in the day to get what needs to be done, then it is unlikely you have the time, propensity or necessary knowledge and experience to focus your efforts on the well-being of your portfolio. This is where Wealth Alliance has built an enviable reputation and imitable track record since our inception during 2001.

If you have any further questions regarding this article or would simply like to establish how Wealth Alliance can assist you, your family and/or business secure a brighter financial future then simply get in touch and arrange an appointment to speak to one of our advisors.

https://wealthallianceltd.com