A Flock of Black Swans

Seaberg, Robert B.
March 2009
Journal of Financial Planning;Mar2009, Vol. 22 Issue 3, p64
Academic Journal
• The first years of the 21st century have already witnessed two "once in a generation" financial declines—"black swans" are alive and well. • Black swans refer to the impossible or highly unlikely actually happening, the "fat tails" of life. This paper argues that risk is greater and more concentrated than we thought, and one is either a victim of the improbable or plans for the uncertainty that is our future. In short, rather than attempting to predict events, we should be spending our valuable time building arks. • We need to build arks to provide safety for three major areas of our total wealth: our financial capital, our physical capital, and our human capital. • In the case of financial capital, we should start from an acceptable risk-adjusted, after-tax rate of return—whatever level of risk you can live with—and let that lead us to an amount we could reasonably afford to spend. We can no longer start with the lifestyle we wish to live and build a risky portfolio in order to fund that lifestyle. The guiding principle here ought to be sustainability. • We also need to define anew what a "safe" investment means to us, and diversify with different risk techniques, such as hedging or insurance products. • Financial capital cannot be treated separately from our physical and human capital. For example, our investment portfolios should take into account the kind of occupational income we receive. Threats to human capital—our earnings potential and productivity—can come from outside the family in the form of lawsuits and physical injury, or inside the family from divorce and family quarrels over estates.


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