“Black-Swan" proofing your portfolio. What you can do.

“Black Swan” is a term coined by Nassim Nicholas Taleb about extremely rare or improbable events that are virtually impossible to predict and have a major market impact.


One such black swan event is the current COVID-19 virus which originated in Wuhan, China and till date has infected more than 80,000 people and has killed close to 3,000 people, mostly in China.

Already causing turmoil to the global tourism industry, it also has had negative consequences spreading to other sectors, such as retail, technology, manufacturing and other sectors, due to a supply-chain disruption in China – where the economy is estimated to be running at approximately 40% to 50% capacity. Other affected countries, including South Korea, Italy, Japan, Singapore and many others may also see their economies slowing as they combat COVID-19.

While no one can be certain when this pandemic will be fully resolved or how deeply it will ultimately impact global GDP, history has shown that Black Swan events, as “frequent” as they might occur, don’t necessarily have a long-lasting impact on the stock market, especially if your investment horizon is over several decades.

With that in mind, investors would be well-advised to “stay calm and stay the course” – to ignore these economic traumas and ride out the short-term market volatility.

That’s easier said than done, as human emotions can be hard to control.


COVID-19 is unlikely to be the last “black swan” event in your lifetime

To put the current COVID-19 health scare into context, the global economy has already navigated and recovered from similar viruses such as SARS in 2003 and MERS in 2013.

There are also many other instances of “black swan” events the global markets has had to manoeuvre, including the Dot Com crash in 2000, the Twin Tower crash in 2001 and the Global Financial Crisis in 2008.

Given this information, it is highly likely that COVID-19 will not be the last “black swan” event in your lifetime. You need to be able to cope with several more of these “black swan” occurrences that will introduce uncertainties and may affect your investment portfolio.

With that in mind, here are five tools that may help “black-swan” proof your investment portfolio.


1.    A proper diversification plan     

Ray Dalio, the founder of hedge-fund giant Bridgewater Associates, says “When you don’t know, the best investment strategy is to be smartly diversified across geographic locations, assets classes and currencies.”

A diversified portfolio, one which stretches across different investment asset classes, combining different types of risk and across different industries etc will ensure that you have a strong fighting chance to emerge out of any black swan events relatively unscathed.

For example, a portfolio structure that consists of a mixture of global equities and bonds may have less volatility in the current stock market turmoil vs. a portfolio that is 100% vested in the “fast-growing” China market.

A proper diversification plan can be “worth its weight in gold” when it comes to riding out the inevitable black swans. If this sounds alien to you, there are always recommended portfolios or model portfolios for your consideration – such as dollarDEX’s Conservative, Moderate, Balanced, Growth and Aggressive portfolios.


2.    Holding cash    

While Ray Dalio might disagree on this point, with his “Cash is Trash” view articulated during a recent interview with CNBC, cash can still be king when it comes to capitalising or riding out black swan events.

For example, the COVID-19 virus will undoubtedly devastate many businesses’ profitability outlook in the short-term which could ultimately heighten the risk of investing in such companies as well as spell widespread retrenchments in countries and sectors reliant on the Chinese economy.

If you are one of the unlucky folks who got retrenched due to this black swan event, thus impacting your source of income, holding sufficient cash on hand will come in handy to help you tide through this rocky period without having to liquidate your investments, which may potentially be in the red.

If you are less directly impacted, your cash serves as dry powder giving you the flexibility to take advantage of potentially lower stock valuations. Like what Warren Buffett says “Buy when there’s blood in the streets”, having ready cash on hand provides that added option to purchase stocks at potential rock-bottom prices just when everyone else is fleeing. To make your cash work harder in times like this, there are money market funds which invest primarily into high quality short term money market instruments with an average return of 1.2%.


3.    Exposure to gold

Gold might be seen as the ultimate tonic to soothe your nerves in volatile times when a black swan appear.

Few other portfolio holdings can match the characteristics of gold to protect against a world in turmoil, besides having cash (in the right currency) on hand.

Furthermore, gold has undoubtedly proven itself to be a worthy investment asset class amid today’s economic climate fraught with uncertainties, such as the upcoming US elections, the impasse on resolutions of the US-China trade war, geopolitical tensions in the Middle East and South China Sea, as well as the disruptive impacts COVID-19 might have on global growth now.

Consequently, gold has topped US$1,600 an ounce for the first time since 2013 as virus fears spur demand for safe haven assets. Citigroup now forecasts gold to hit US$1,700 in the next six to twelve months and setting its sight on breaching the US$2,000 mark in 2021/22.

While there may be other safe havens to park your assets during a black swan events, none is likely to be as effective as gold when the lights go out. Besides buying physical gold to keep, there are actually unit trusts and ETFs that invest into gold and other precious metals that you can take advantage on.


4.    Strategic and regular portfolio rebalancing

Sell your winners and buy your losers. Sounds like a sure route to the poorhouse? This is however seen as a disciplined approach to sell high and buy low and is often termed as “rebalancing” your portfolio.

By strategically selling one type of investment and buying another in order to maintain your target asset allocation, such a strategy ensures that your portfolio does not get overly-skewed to any one particular asset class category. Put simply, rebalancing reaffirms your diversification decision.

Over the long run, a periodically rebalanced portfolio has demonstrated better risk-adjusted returns compared to one that does not.

Note that this is a strategic rebalance, and you should buy losers that you still believe in rather than just any loser out there in the markets. It is still important that you do your research and understand the risks before making any investment decisions.  


5.    Value averaging plan

The last tool in your black swan survival kit is to practice value-averaging in your investing process. This is similar to dollar-cost-averaging but instead of contributing a fixed amount of capital each month, one can capitalise on a market downturn caused by a black-swan event by buying even more.

The advantage of a value-averaging plan is two-fold.

Firstly, compared to a lump-sum investing strategy, value averaging helps investors avoid the pain, both psychological and monetary, associated with the substantial decline in one’s portfolio capital if a black-swan event strikes, particularly in the early years of your investing journey.

Secondly, compared to a dollar-cost-averaging strategy, a value-averaging plan (VAP) will allow an investor to capitalise on a market sell-down by increasing the purchase amount. Remember the saying of buying when there’s blood in the street? dollarDEX is one platform that offers this unique strategy and you can find out how a VAP works here.


These 5 tool kits will ensure that your portfolio has a chance to survive almost any black swan events, allowing you to sleep soundly at night.

With access to over 1000 professionally-managed funds across diversified investment instruments, dollarDEX enables investors to put their money into various asset classes including the ones mentioned earlier and achieve diversification through its online platform at no fees.

It is also one of the few platforms in Singapore that allows investors to easily kick-start one’s investing journey in an affordable approach while having that additional flexibility to capitalise on any black-swan events.     

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