Black swan events explained
Extreme, unexpected market events and their impact on financial markets, risk and portfolios.
Play with it
Tail risk and black swans. Feel the math of a 50% loss, then stress a portfolio that looks safe until it doesn't.
Loss-50%
Gain needed to break even+100%
Years to get back10.2at 7.0% a year
After a 50% loss you need a 100% gain just to get back to where you started. At 7.0% a year that takes about 10.2 years. Losses and gains aren't symmetric, which is why avoiding a loss you can't recover from matters more than any single good year.
Try this
- Set the loss to 50%, like the episode. Is the gain needed 50% or 100%?
- Compare a 20% loss with an 80% loss. The curve isn't a straight line. Where does it bend sharply upward?
- Lower the growth rate and see how many years a deep loss can cost.
The math
- the loss, as a fraction (0.5 for 50%)
- what's left of each dollar
Quick check
Two questions to see if it clicked. Answers explain themselves.