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Financial Planning

Help clients keep a calm and long-term focus during a black swan event

If you are a financial professional that survived the Great Recession, you know exactly what it looks like when your clients are afraid to lose everything. The dramatic market downturn of 2008 is commonly known as a Black Swan event, a surprise drop in the stock market with massive ramifications. In the current market, many investors are worried about a repeat of the last major stock market drop, which is not too distant of a memory.

But financial professionals also understand that investors should not make knee-jerk reactions or dramatic changes to their portfolio in reaction to a market dip. By putting the right planning and tools in place from the start, your clients may be able to weather the storm no matter what the markets do next.

How to explain black swan events to a client

In his 2007 book “The Black Swan: The Impact of the Highly Improbable,” Nassim Nicholas Taleb explains that some events are rare and unpredictable. This includes the stock market. For example, in the months and years following the release of this book, the United States entered its worst economic crisis since the Great Depression.

The Global Financial Crisis of 2007 – 2008, is considered a Black Swan event. It was large, unpredictable, and left a long-lasting impact on many workers, homeowners, investors, and others in nearly every corner of the economy.

Black Swan events are scary for investors, as are bear markets, market corrections, and other large market declines. The big difference for your clients to understand between a Black Swan event and a regular market correction is the rarity and severity. Black Swan events are far worse than the 10% decline market correction or 20% decline bear market. In the stock market crash of 2008, the market fell more than 50% in a period of less than 18 months. While still considered rare events, in hindsight you can find them occurring every few years. Some of the more well-known Black Swan events include:

  • 1997 Asian Financial Crisis
  • 2000 Dot-Com Crash
  • 9/11
  • 2008 Global Financial Crisis
  • 2011 Fukushima Nuclear Disaster
  • 2015 Black Monday
  • 2016 Brexit

Financial professionals aim to help clients take some precautions for a Black Swan event, while discouraging clients from avoiding the markets completely for fear of a sudden and unexpected drop in stock prices.

Preparing for a black swan event

As clients age and move closer to retirement, shifting assets from the stock market to bonds and other fixed income products may be an option to diversify and hedge against potential losses. But even bonds and other assets like real estate can get caught in the fallout of a Black Swan market.

Certain types of annuities can be another option for clients to address the risks of a Black Swan event. For example, some registered index-linked annuities can offer investors a guaranteed income while providing the protection of a predetermined downside floor. If the market drops below that floor, the contract is protected from experiencing the full market decline.

The fallout from black swans

While the Dow Jones Industrial Average fell from 14,164 on October 9, 2007 to 6,594 on March 5, 2009, there was a big upside for investors that left their money in the equity markets and waited to ride out the recession.

Less than a decade later, the stock market surged to new all-time highs as it set record after record. In January 2018, the Dow passed 26,000, a value nearly four times higher than the bottom of the recession. If investors sold everything when the market fell, they missed out on the ride back up to new all-time highs.

Keep calm and carry on

At the onset of WWII, the British government urged people to “keep calm and carry on.” Nowhere is this attitude more important than the stock market. It is imperative that investors keep a calm, long-term focus even in the face of Black Swan events. With the right tools, investments, and financial professional by their side, that is a much easier goal to achieve.

Registered index-linked annuities are complex Insurance and investment vehicles. Before investing, investors should speak with a financial professional about the Contract’s features, benefits, risks and fees and whether the Contract is appropriate for them based on their financial situation and objectives.



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