Swans of another color.

"Black swan" events are supposed to be extremely rare, just like a swan that has black feathers instead of white. But as many observers have noted, these purportedly low-probability events tend to occur with surprising frequency, most recently on March 11, when the earthquake and tsunami struck Japan.

Other black swan events of the past decade include the 9/11 terrorist attacks, Hurricane Katrina, the BP oil spill and the recent uprisings in Arab nations. For the financial markets, of course, the decade's biggest black swan event was the 2008-2009 market meltdown.

The black swan metaphor goes back to ancient Rome. For centuries, it referred to an impossibility -- until, that is, an actual black swan was discovered in Australia in 1697. The term, lately popularized by author Nassim Nicholas Taleb, is now used to refer to highly unlikely occurrences that we tend to assume will never actually happen. But, as we have discovered again and again, low possibility doesn't mean no possibility. And when the low possibility comes to pass, the results are often devastating.

What are the financial implications of all this? It may be highly unlikely that the stock market will drop 50% again in the near future, or that a state government would default on its municipal bonds, or that our homes will burn down. But these aren't impossibilities -- which is why we should be leery of making big bets on any one investment and why we should think carefully about whether we have the right insurance.

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