What is a black swan event?

In the world of investing, the term 'black swan' is used to describe a market-moving event that no one saw coming. Let's take a look.

figurine of large black swan among small white swans representing stock market crash

Image source: Getty Images

A 'black swan' is a term you probably heard more in 2020 than in any other year in recent memory. Despite its avian name, a black swan has absolutely nothing to do with swans, any other kind of bird, or ballet. 

So, if you're an avid birdwatcher who has found yourself on this page, I'm sorry, friend, you're in the wrong place!

So, what is a black swan, and more importantly, what does it have to do with investing?

The latest black swan event

In the world of investing, the term black swan is used to describe any market-moving event that no one saw coming. A perfect example of this is the coronavirus pandemic, which profoundly shaped the investing landscape of 2020, despite only coming onto the radar of ordinary investors in late 2019. 

Before 2020, investors hadn't really seen a massive black swan for a number of years. Sure, you could call unexpected events of smaller significance black swans, such as the election of former US president Donald Trump, or the affirmative Brexit vote in 2016, or perhaps the onset of the global financial crisis (GFC) in 2008. 

But the upper limits of the term only apply to a few calamitous events, such as the pandemic and the 9/11 attacks in 2001.

Where did the term come from?

Despite the birdwatching disclaimer earlier, this term does indeed have an ornithological origin. Prior to Captain Cook's arrival in Australia, a black swan was a term used throughout the British Empire to describe an impossible scenario. See, back then, the only swans around were white, so a black swan was an easily imagined metaphor for anything deemed impossible.

But that all changed when white settlers arrived in Australia and discovered there was, indeed, such a thing as a black swan. Thus, the term evolved to mean a rare but significant event that doesn't seem possible or likely to occur, until it does.

How can investors prepare for a black swan?

By their very nature, black swan events are impossible to prepare for. Yet they are an occurrence that all investors should be ready to accept. We won't know when, where, why or how, but a black swan will hit us again at some point.

So, what can investors do? 

Well, it's worth asking yourself questions like: 'What kind of event can derail the companies in my portfolio?' as well as, 'Are my businesses strong enough to withstand anything the world can throw at them?'.

There are limits to this, of course. No one can predict the future. But there's a reason why some companies thrived during the pandemic while others struggled. Some companies sell products that people simply can't live without, while others don't. 

While we've seen companies providing air travel, cruises, and car rentals struggle enormously in the Brave New World that the pandemic created, it's hardly quenched the globe's desire for Coca-Cola, or Apple products, for example. 

In the immediate aftermath of COVID-19, people were using social media, YouTube, and Google search more than ever. Supermarket giants such as Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) were flat strapped. 

And the accelerator hit the floor in terms of the transition to a cashless society, benefitting buy now, pay later companies like Block Inc (ASX: SQ2) and Zip Co Ltd (ASX: ZIP) at the time. 

Even at the peak of national coronavirus lockdowns, we still needed the simple household staples like the laundry powder, deodorant, shampoo, and bleach that Unilever PLC (NYSE: UL) manufactures.

Minimising the risks

So, while it's impossible to predict or prepare for a black swan, you can take steps to minimise the risks that such an event might pose to your own portfolio. If your company or companies have a powerful brand, a loyal customer base, or they make goods and services people can't live without, they have a head start against a black swan.

Asking these questions about your own portfolio holdings can help assuage any concerns you may have about a future black swan event. But, as is the very nature of the black swan, we can never be completely safe. It's just one of those things in investing that we all have to accept is possible (or inevitable).

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a 'top share' is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a 'top share' by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Block and Zip Co. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Unilever Plc. The Motley Fool Australia has positions in and has recommended Block and Coles Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.