What’s a Black Swan Event? How to Spot and Prepare for This Outlier

What is a black swan event? Learn about black swan events and how you can attempt to protect yourself and your portfolio from adverse shocks.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/black swan: how to spot and prepare for unpredictable events
4 min read
Photo by TD Ameritrade

Key Takeaways

  • A black swan event falls outside the realm of regular expectations and carries an extreme impact
  • Examples of black swan events include the 2008–09 financial crisis and 2000–01 dot-com bubble burst
  • Black swans are difficult to predict, but investors can still take simple steps to prepare for extreme events

Black swans don’t charge or growl, but they do conjure fear and worry on Wall Street. A so-called black swan event is defined, in part, as an “outlier” that carries deep, far-reaching consequences for investors. Black swans have left their mark throughout market history. It’s the kind of “animal” investors would be wise to study and understand.

“Black swans have happened before and will happen again. They serve as a reminder to prepare and not be overly concentrated in any one investment,” said Viraj Desai, Director, Portfolio Manager, at TD Ameritrade Investment Management, LLC. “You want to be adequately diversified so you can weather black swan events and be poised to take advantage of the resulting fallout.”

Since March 2020, we’ve seen our share of outlier events. Building a portfolio to withstand extreme circumstances is essential for any long-term investment strategy. So, what is a black swan event? Would the global COVID-19 pandemic be a black swan, or possibly Russia’s 2022 invasion of Ukraine? Here’s where to start your evaluation.

How Is a Black Swan Event Defined?

A black swan event has three components, according to Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader: it’s outside the realm of regular expectations because nothing in the past can point to its possibility; it brings an extreme impact; and, despite its outlier status, people are inclined to come up with explanations for the event after the fact to make it seem predictable.

Taleb’s 2007 book The Black Swan: The Impact of the Highly Improbable popularized the term. According to Taleb, Dutch explorers who traveled to Western Australia in 1697 were the first Europeans to see black swans. Previously, they’d assumed all swans were white.

The black swan “illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge,” Taleb wrote in an excerpt of his book that was published in The New York Times in 2007.

What Are Some Examples of Black Swan Events in History?

The collapse of Lehman Brothers and the 2008 financial crisis are considered recent examples of black swans, along with the burst of the dot-com bubble in 2000-01 and the “Flash Crash” of May 2010. Earlier black swan examples include the rise of the internet and the personal computer, World War I, the dissolution of the Soviet Union, and the September 11, 2001 terrorist attacks, according to Taleb.

Are the pandemic and the Russia-Ukraine war black swan events? COVID-19 certainly wouldn’t have made its way into institutional risk models in a material way before 2020, Desai noted.

“COVID-19 was a quintessential black swan event,” Desai said. “It was the sort of ‘exogenous variable’ not typically considered in a portfolio construction exercise, it negated most convictions going into 2020, and it rendered most efforts to provide portfolio durability moot.”

Why Do Black Swans Happen?

Black swans, broadly speaking, are hatched deep in the human psyche, according to Taleb.

The central idea of Taleb’s book, he wrote, concerns “our blindness with respect to randomness, particularly the large deviations: Why do we, scientists or nonscientists, hotshots or regular Joes, tend to see the pennies instead of the dollars? Why do we keep focusing on the minutiae, not the possible significant large events, in spite of the obvious evidence of their huge influence?”

No single factor led to the 2008 crisis, for example. However, an abundance of cheap, easy credit and a “this-time-it’s-different” or “irrationally exuberant” mentality probably contributed to the housing boom that became the housing bust. Red flags were fluttering all over the place, but few caught on at the time.

That’s easy for us to observe now, over a decade later. But it’s one of the most vexing things about black swans: Hindsight is 20/20. In reality, nobody really knows what causes a black swan event.

Are There Black Swan Investing Warning Signs?

A black swan event, by definition, is nearly impossible for anyone to see coming. Still, investors can watch a few indicators, such as Treasury yields or the Cboe Volatility Index (VIX), for signs of escalating concern among market professionals. The VIX, aka the “fear gauge,” often spikes higher during periods of market or political turmoil around the world.

Another potential warning sign is volatility skew, a measure of the implied volatility (IV) of out-of-the-money put options versus the IV of out-of-the-money call options. The Cboe SKEW Index, which some refer to as the black swan index, measures the probability of outlier events, or down moves, of two to three standard deviations.

The SKEW’s value typically ranges from 100 to 150, although it can move above and below that range. According to the Cboe, a SKEW value at or close to 100 indicates a “normal” market (meaning the market views the likelihood of a black swan event as low). A SKEW at 115, for example, suggests a 6% risk of a black swan event occurring; at 135, that risk rises to 12%. (In late January 2021, the SKEW was around 147.)

How Can Investors Prepare for Black Swans?

For investors, constructing a portfolio strategy entirely around doomsday expectations for an impending black swan is probably ill-advised. But there are a few ways to gird against volatile, uncertain markets, if not a black swan event, to establish more of a “defensive” posture.

According to Desai, owning a portion of your portfolio in U.S. Treasuries is one route; others include buying index put options (with an appropriately approved account) or allocating a larger portion of a portfolio to what have been considered “safe havens” such as gold or cash. “Although asset allocation and diversification do not eliminate the risk of experiencing investment losses, good, old-fashioned portfolio diversification is also a sound idea: Conduct regular assessments of your asset allocation and avoid having too many assets in one particular stock, sector, or market,” he added.

Another way to look at it: Risks and potential black swan events will always be there, but so will opportunities.

Black swans “often create opportunities to take a contrarian approach, as many investors run for the exits,” Desai explained. “While it’s difficult to predict a black swan, those who were not completely caught off guard may have opportunities to add low-priced assets to their portfolios and potentially benefit if and when the market recovers.”


Key Takeaways

  • A black swan event falls outside the realm of regular expectations and carries an extreme impact
  • Examples of black swan events include the 2008–09 financial crisis and 2000–01 dot-com bubble burst
  • Black swans are difficult to predict, but investors can still take simple steps to prepare for extreme events

Do Not Sell or Share My Personal Information

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

Briefing.com and other third parties mentioned above are separate from and not affiliated with TD Ameritrade, which is not responsible for their services or policies.

*Discretionary advisory services are provided for a fee by TD Ameritrade Investment Management, LLC, a registered investment advisor and subsidiary of The Charles Schwab Corporation. Brokerage service provided by TD Ameritrade, Inc. For more information, including investment risks, please see the Disclosure Brochure (Form ADV Part 2A).


Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. © 2024 Charles Schwab & Co. Inc. All rights reserved.

Scroll to Top