Black Swans - Black Swans Written by Larry Swedroe Thursday 12 March 2009 00:00 Overview When the

Black Swans Written by Larry Swedroe Thursday, 12 March 2009 00:00 Overview: When the market experiences significant swings, some investors may be tempted to try to time the market in an effort to boost returns. The following explains why it is extremely difficult, if not impossible, to enhance returns through market timing efforts. In his book The Black Swan, Nassim Nicholas Taleb notes three things that constitute a black swan: 1 • It is an outlier, as it lies outside the realm of regular exceptions. • It carries an extreme impact. • Human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. In other words, events that occur without any forewarning that they would occur are considered black swans. The events of September 11, 2001 are an example of a black swan, as is the stock market crash of October 19, 1987, when the Dow fell 23 percent in one day. If investors could avoid the effects of black swans, the impact on investment returns would be enormous. Consider the following: The working paper, “Black Swans and Market Timing: How Not to Generate Alpha,” studied stock market returns in 15 developed countries (including the U.S.) for varying time periods, ranging from 31 years for Canada and Thailand to 79 years for the U.S. The authors found that if investors could avoid the worst 10 days, their returns would be 150 percent more than the returns of buy-and- hold investors. 2