translation: "a rare bird in the lands, and very like a black swan." 

The Black Swan Theory was popularized by Nassim Nicholas Taleb in his 2007 book The Black Swan: The Impact of the Highly Improbable. 

According to Wikipedia and the author's own definition a Black Swan event has three notable characteristics: 

1. The event is a surprise (to the observer). 

2. The event has a major impact. 

3. After its first recording, the event is rationalized by hindsight, as if it could have been expected (e.g., the relevant data were available but not accounted for).  

For instance, the Japanese nuclear meltdown after the earthquake and tsunami in March 2011 were considered as Black Swan events: 

The Japanese Nuclear Commission had the following goals set in 2003: " The mean value of acute fatality risk by radiation exposure resultant from an accident of a nuclear installation to individuals of the public, who live in the vicinity of the site boundary of the nuclear installation, should not exceed the probability of about 1x10^6 per year (that is , at least 1 per million years)". That policy was designed only 8 years ago. Their one in a million-year accident almost occurred about 8 years later (I am not even sure if it is at best a near miss).

--- Nassim Nicholas Taleb, author of the Black Swan. 

In the financial world the sub-prime mortgage crisis of October 2008 resulted in a 57% drop in the U.S stock market[1] was also considered to be a Black Swan event. 

Not all Black Swan events are disasters - sometimes they can be beneficial. The rise of the internet and the invention of the personal computer for instance could also be considered Black Swan events. 

So how does this affect our investments? 

Canadian investments have been outperforming[2] for more than 10 years and the comfortable consensus that has formed is that the trend will continue for many more years. Currently very little new money is going into international funds - the bulk is going into Canadian mutual funds. 

Canadians know they should be diversifying their investments internationally but they are not doing so.

Why not? 

Investors naturally go with what's hot currently and right now Canadian investments are hot. Canadians are avoiding international funds in droves. It is all perfectly natural of course but performance chasing is almost always wrong.  

Everyone knows that swans are always white. That is however, until real black swans were discovered in Australia in the 17th century! 

Beware the Black Swan. 

[1] http://dshort.com/charts/index.html?current-market-snapshot

[2] S&P/TSX versus MSCI World indices 10 yr performance. http://www.globefund.com/static/romf/generic/tabbench.html

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