Investors have weathered the political gyrations and the turbulence in economic conditions all year. But, as we get into September and the last quarter of 2017, fears and anxieties from the past, appear to be catching up. Bad memories from the infamous Black Monday in October 1987 and start of the financial crisis in September 2008 are rearing their ugly heads, driving money flows out of equities despite a fundamentally sound, albeit rich, financial market.

Hedging activity against a downturn has increased with fund managers namely Bill Ackman and George Soros, loading up on bearish options on the S&P 500. Many would like to emulate the hedge fund firm – Universa Investments that made ~$1 billion in the fall of 2015, as markets collapsed, by adopting a strategy that seeks to profit from extreme events in financial markets.

But betting on low probability events is not for the faint of heart. In 2016, several unexpected events – from Trump winning the U.S. presidential election to Leicester City winning the Premier League to Brexit, were surprises that went against conventional thinking and left many fund managers a lot poorer.

Future Wealth’s View

In his book titled “The Black Swan”, Nassim Nicholas Taleb defines black swan as an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict. In the wake of the global financial crisis, fear of such “black-swan” events have investors seeking protection should markets plunge.

At Future Wealth, our view on the market and pretty much everything else in life is probabilities. We believe that given that the future is uncertain, investors should always think in terms of probabilities, never guarantees. While it is possible, albeit with a very low probability, that we could have a “black swan event” between now and end of the year, the longer one’s time horizon, the higher the probability of gaining in the stock market.

This is emphasized in a statistical concept in probability theory known as “Gambler’s Ruin” which, putting it simply, states that anyone playing a negative expected value game will eventually go broke. This concept is true in gambling where the casino slot machines have a 10 percent edge on average for each bet and so, while any single bet can force a casino to pay out, but on a long-term basis, casinos will make a lot of money, off almost all gamblers. The same is true of betting against the stock market.

And so, while there are few in search of black swans, we recommend our clients enjoy the walk in the park and take in the beauty of white swans swimming in the lake.