Risk Analysis Prepares Investors for Black Swan Events During Long-Horizon Investing

·3 min read

@RISK Software from Palisade Powers Insights for Portfolio Optimization

Savvy investors and analysts know to expect the unexpected. Probability simulations addressing unexpected market fluctuations provide insights to help manage long-term investment portfolios in ways that conventional static models cannot address.

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Amid a global pandemic, with Wall Street dealing with the uncertainty of the upcoming presidential and congressional elections, 2020 has conditioned investors to live with volatility. The lessons learned will shape strategies for long-term investment portfolio construction in the future. Over the course of a long-term time horizon, black swan events will happen in financial markets. The "dotcom" crash in the early 2000s, the 9/11 attacks, the 2008 global financial market crash, the Brexit vote in 2016, and COVID-19 in 2020 are prime examples.

A primary factor in long-term portfolio outcomes is the allocation among asset categories according to Joe DiNunno, an asset allocation strategist and consultant to FiduciaryVest, an institutional investment advisory firm. Acceptable investment management within an underlying asset class is a secondary issue.

DiNunno recognizes that black swan events are far more common than financial models based on the normal distribution would indicate. "While the normal distribution assigns about a one-in-one-thousand chance for the stock market to crash as it did in 2008, these types of declines occur more frequently than that," says DiNunno.

Probabilistic, or stochastic, asset allocation models using @RISK Monte Carlo simulations examine a range of possible outcomes and how likely each is to occur. Understanding the long-term impact of diversifying a portfolio requires robust analysis.

By incorporating longer time horizons and realistic probability distributions associated with asset classes, DiNunno said @RISK addresses issues beyond what can be done with static financial models. This includes probabilities of reaching target returns and the ability for a client to meet financial obligations without tapping into portfolio principal. "The models give our clients a strong indication of the impact that each component of asset allocation and diversification delivers in terms of their specific needs for future investment returns and risk management," DiNunno said.

"Extreme black swan events are by definition unexpected. Ironically, they should be expected to happen over the course of decades," said Palisade CEO Randy Heffernan. "Whether the events are positive or negative for investors depends on preparedness, perspective and positioning. @RISK provides a proven, accessible method to forecast risk and prepare portfolios for the unexpected, turning risks into opportunities."

Click here to read the full case study on Joe DiNunno and FiducairyVest’s investment strategies using Monte Carlo simulation. In addition, register here for their upcoming webinar showcasing @RISK’s utilization in their portfolio optimization and asset allocation planning.

About Palisade

With more than 150,000 users globally, Palisade Company provides the world’s largest comprehensive risk and decision analysis software platform. Combining over 35 years of expertise and partnerships with over 90% of the Global Fortune 100 across a multitude of verticals, Palisade Company is uniquely positioned to offer a full suite of analytics tools that includes:

Headquartered in Ithaca, NY, Palisade Company helps companies optimize their decision making in many industries that range from finance to oil and mineral exploration, real estate to heavy manufacturing and pharmaceuticals to aerospace, as well as top business schools around the world. For more information on Palisade Company, call 800-432-7475 or visit www.palisade.com.

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Contacts

Media Contact

Scott Yates
Onpoint Communications (for Palisade)
919-649-6621
scott@onpointprgroup.com

Matt Barker
Global Director of Marketing
Palisade Company
Tel: +1 252 813 7277
mbarker@palisade.com