If you follow the markets and the economy closely, you know the yield curve is getting flatter by the day, inching closer to the point of inversion.
What exactly is an inverted yield curve?
An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality.
This somewhat backward interest rate environment is out of whack and highly unusual. It doesn't typically make sense that one can borrow money in the short-term at a lower rate than they can many years down the road. This abnormality is a signal to the markets that something isn't right.
The most prominent signal might be that of a recession. Since 1955, a negative curve has accurately forecast all 9 U.S. recessions. On average, it has taken 18 months after the point of inversion for the recession to begin.
As of yesterday, the 2-year sat at 2.12% while the 10-year yielded 2.26%. So, as you can see, the point of inversion is yet to be reached. However, if or when it does, the markets will likely see this is a bearish indicator that will likely send stocks plunging into the red.
Couple this with the ongoing trade war with China, and, well, things could get very dicey over the next few months or perhaps years. It certainly begs the question, how does one invest in this type of environment as we move forward?
The answer is:
It depends. It depends on many factors and variables. What is your risk tolerance? How old are you? Are you young or close to retirement? Are you single? Do you have kids? Is the money your investing necessary for your everyday living expenses or cash that you can afford to lose? How fully invested are you at this moment? Have you seen healthy returns along with the overall market this year? Are you new to the game and looking to put new money to work?
With all these questions to be asked, it's no wonder that the investment world can be a scary place to be at times.
There is no exact science to investing in stocks as each individual game-plan should be different and molded around the variables mentioned above as well as the personality and risk tolerance of the investor.
Similar to the game of poker, many strategies can work in developing a winning formula. Also, like with the game of poker, things can blow up and unravel in a hurry if not extremely careful and knowledgeable. If somebody tells you they have it all figured out - turn and run the other way as fast as you can.
Here is what I know: Over the last 100 years, the stock market has gone in one direction - UP! Those who have invested in the equities for the long haul have been greatly rewarded. (Below is a 100-year chart of the Dow Jones.)
As you can see, there have been significant setbacks, corrections, and crashes during this period. These pullbacks are part of the game. Often, they are healthy and exactly what the markets need to bounce back and make the next push toward new highs.
The investor who has the stomach to "ride it out" or possibly buy the dips will typically outperform his or her counterparts. Those who panic sell (usually at the worst possible time), end up with a busted bankroll, likely to never return to the investment world again.
One must look for opportunities during the turbulence. At this time, if a storm is indeed brewing, be prepared for the volatility that might unfold.
How does one do that?
It's essential to have cash on the sidelines that is ready to be put to work. Be prepared to step in while others panic. Implement a dollar cost average strategy by investing a little at a time in great companies that you wish to own. As the markets fall, nibble at stocks that you like and believe in for the long haul.
Does Warren Buffett fold when times get tough? No, he weathers the storm while snatching up high-quality stocks at bargain discounts. (Taking a page out of Warren's book is never a bad idea.)
Again, nobody has a crystal ball, and there is no 100% proven winning strategy. The markets will continue to move at a very rapid pace. Money will flow out of one's hands and into another. In the long run, few will win, while many will lose.
Moving forward, the smart investor will develop a game-plan and stick to it through thick and thin. In doing so, he is well prepared for whatever the market throws his way.
Ok, that's all I've got. Good luck navigating as we move forward. Something tells me the waters are about to get extremely choppy as the yield curve continues to flatten and the trade war looms. Take advantage of the opportunities that will arise. In the long run, you will be happy that you did.
Note: All securities trading, whether in stocks, options, or other investment vehicles, is speculative in nature and involves substantial risk of loss.
I encourage that you seek personal advice from your professional investment advisor and do your own homework before investing.
I recommend only investing capital that you are willing to lose.
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