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Of Black Swans and Oily Pelicans…

By David Waddle, Brian Haugen, and Steve Cann

You’ve no doubt, by now, heard the term “black swan” used to describe some improbable event of the past few years. This moniker derives from the long-held ancient belief that all swans were white, until the first documented sightings of black swans emerged in the late 1600s. In modern dialect, we ascribe the term “black swan” to highly unlikely, statistically incalculable, frequently unforeseen, and oftentimes largely impactful events. Recent black swans have shown up in the form of a burst housing bubble, bank failures, volcanic eruptions, and earthquakes, to name a few. Now we have a bird of a different feather; this black swan is more like an oiled pelican.

There’s a litany of lessons to be learned from the Deepwater Horizon disaster, but in keeping with the objective of our VIE – People + Places columns, we’ll narrow these down to the impact on your personal investments. In hindsight, it’s easy to trace the devastative impact of a single improbable event within the operations of a global, publicly traded and heavily analyzed blue-chip corporation. One of the world’s largest oil producers was instantly transformed from a conservative, dividend-paying core holding of many retirement portfolios into a highly speculative, volatile stock-market gamble. Even worse for investors along the Emerald Coast, this came hand-in-hand with a renewed slowdown in business revenues and real estate values, etc. Thankfully, the oily impact to date has been manageable and, if this trend continues, we should look to a local recovery sooner rather than later.

You should take this opportunity to reflect on your current investment strategy, as there are some pertinent lessons that are well illustrated by this event. Here are a few thoughts from our team here at Emerald Coast Wealth Advisors of Raymond James:

1. Diversification matters. Sometimes, what’s old, worn-out, and boring is still what’s best. This is the case with portfolio diversification. We don’t mean having two different advisors, or diversifying your employee stock options with the real-estate holding of your primary residence. What we’re referring to is true diversification wherein your total exposure to any stock, any sector of the economy, or even any unforeseen world event is minimal and therefore not devastating. The cold hard fact is that anything can happen, and probably will eventually, and either your portfolio will wither overnight or it won’t, depending upon how well you’ve diversified. While diversification does not ensure a profit or protect against a loss, a single devastating event can erase decades of investment growth.

2. Perception (vs. reality) matters. Recognize that even a well-oiled investment plan can get harmed by outside perceptions. Sometimes your financial destiny may be influenced by the emotions of the crowd. Take, for example, the press coverage of our area. They made it sound like we were covered in oil. While we did not have anywhere near the impact the press indicated, we still felt a decline in tourism from the negative perception of this distorted coverage. There are times your investments will lose money even though you’re doing the right thing. Eventually, reality tends to prevail over perception.

3. Sometimes it rains. Have you ever noticed how congested our traffic gets when it rains along the Emerald Coast?  I’m sure you know why—our tourists are taking advantage of other amenities when the beach isn’t the answer. Folks come down on vacation knowing full well it might rain. Yet they come anyway. Why? Because they know they can hedge their bet via the other activities we offer. Whether our vacationers get burnt out on the beach due to sun, rain, June grass, riptide, jellyfish, or, yes, even oil, the Emerald Coast has more to offer than just our pristine beaches. They’ve hedged their bet!  How is your portfolio prepared for rain?  Do you have a fallback plan in case the markets take a different course than you expect?  Have you hedged your bet in your portfolio?

All of us along the Emerald Coast will need to continue to work together on the recovery of our region for the benefit of all. Since there is no monopoly on good ideas, we’ll need as many of those ideas as we can muster to rebuild our economy. Similarly, in your financial life, you’ll often achieve greater success with the right team of experts on your side. Consider the help of a qualified financial advisor, someone you’re comfortable working with, to round out your personal strategies and ideas. It just might make the difference for your own financial recovery and success.

— V —

Prepared by David Waddle, Brian Haugen, and Steve Cann of Emerald Coast Wealth Advisors of Raymond James and Associates, which specializes in designing personalized, diversified financial portfolios for high-net-worth investors along the Emerald Coast.

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