How Rare are “Black Swans”?

“Black Swans” are rare events by definition.  However, I would contend many of the events that people classify as “Black Swans” happen with greater regularity than most think.  Doug Kass compiled a list (via Barry Ritholtz) of “Black Swan” events in the last ten years:

• Sept. 11, 2001, attacks on the World Trade Center and Pentagon;
• 78% decline in the Nasdaq;
• 2003 European heat wave (40,000 deaths);
• 2004 Tsunami in Sumatra, Indonesia (230,000 deaths);
• 2005 Kashmir, Pakistan, earthquake (80,000 deaths);
• 2008 Myanmar cyclone (140,000 deaths);
• 2008 Sichuan, China, earthquake (68,000 deaths);
• Derivatives roil the world’s banking system and financial markets;
• Failure of Lehman Brothers and the sale/liquidation of Bear Stearns;
• 30% drop in U.S. home prices;
• 2010 Port-Au-Prince, Haiti, earthquake (315,000 deaths);.
• 2010 Russian heat wave (56,000 deaths);
• 2010 BP’s Gulf of Mexico oil spill;
• 2010 market flash crash (a 1,000-point drop in the DJIA);
• Surge of unrest in the Middle East;
• Thursday’s earthquake and tsunami in Japan

Now frankly I don’t recall all of these events; however, all of them had a drastic human toll and/or economic toll.  So when it comes to portfolio management, and as the linked articles allude to, a few important things stand out:

1. “Black Swan” events are more frequent than one probably anticipates
2. “Black Swan” events are drastic
3. “Black Swan” events are unpredictable
4. Given the first 3 bullets an investor should probably have a plan in place when a “Black Swan” event happens

To elaborate on the last bullet, I am not advocating building a portfolio around the extremes (except in a few possible cases).  What I am saying is that the time to plan for a “Black Swan” event is not after an event, but beforehand given that you don’t know when such an event will take place.  Put it this way, the time to buy insurance on a house is not when it’s on fire.