Human Psychology, Market Timing, and the Inverted Yield Curve

Clients have asked recently about the reported inverted yield curve and what that means for their investments. Further, they have been asking if it is time to sell and go to cash. 

Many are pointing to the inverted yield curve as the predictor that a recession is around the corner. An inverted yield curve is when longer term interest rates (10 years) move lower than short term interest rates (3 month). This can be a good predictor that a recession will occur sometime in the next 12-24 months. 

The average stock market gain in the 18 months following the yield curve inverting has been about 15%. Recessions generally occur 8-24 months after an inverted yield curve.  Stock prices will probably be affected, but it would be a mistake to think that selling all your portfolio and going to cash would be a good idea based on a yield curve inversion.   

“All of us would be better investors if we just made fewer decisions.”

— Daniel Kahneman
(Thinking, Fast & Slow)
 

My clients are really asking me to time the market. This is very difficult to do with any consistency. There is an enormous amount of data showing that investors who attempt to time the market have lower returns than those who stick to their investment plan and ride the waves of the market. 

As boring as it is, the best decision is to do nothing. This is a discipline that is extremely hard for most investors. If you have a time horizon of more than a few years you should not worry too much about short term fluctuations in the market. The recession that may or may not come will pass and your portfolio will be higher over the long term.   

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