When the data goes dark

Markets thrive on numbers, models and forecasts, but sometimes those signals go dark. If the Global Financial Crisis and the COVID-19 Pandemic taught us anything, it’s that the most impactful events in markets are often those no spreadsheet could see coming.

In a recent article, we learned that in a world of rapid change, relying too heavily on “what’s worked before” can leave portfolios exposed. What do you do when the data you rely on suddenly disappears?

3 risks for investors when the data goes dark

1. Unknown unknowns (Knightian Uncertainty): Events you can’t model or predict, such as paradigm shifts, big regulatory changes, pandemics and social movements aren’t captured well by standard risk models.
2. Overreliance on what's worked before: When you lean too heavily on historical data or quantitative risk models, you may be blindsided by the future.
3. Fragile portfolios when over-optimized: Portfolios that are tuned for specific scenarios may break under pressure when the unexpected hits. Overconcentration, excess leverage or lack of flexibility can increase vulnerability in volatile markets.

2 reasons it matters more than ever:

1. Heightened global shifts & disruption: Between AI transforming industries, accelerating climate risk, political instability and evolving financial norms like crypto and central bank digital currencies, the landscape is always changing – increasing exposure to uncertainty.  
2. Markets reward resilience, not just predicted performance: In unpredictable environments, those who accept uncertainty, and plan for it, are better positioned not only to withstand shocks, but also to take advantage of them.

1 key takeaway for investors

1. Build for uncertainty: You can’t model everything, but you can prepare for anything. Don’t chase precision or certainty; instead, design portfolios that are resilient. Investing isn’t just about crunching numbers—it’s about acknowledging the limits of what we know and building portfolios with the potential to be strong enough to handle what we don’t. The future may be uncertain, but your strategy doesn’t have to be.

For a more details on this topic, listen to this MoneyTalk video with Jeff Evans, CFA, Vice President & Director, Lead of Empirical Research & PM Support, TD Asset Management Inc.

The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.

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