1. They invest every month.
2. They build diversified portfolios of low-cost index funds
3. They ignore investment news.
Warren Buffett says investing is simple, but it isn’t easy. The toughest part might be ignoring economic news.
Consider the latest: Many are worried about the inverted yield curve. On Wednesday, August 14th, the interest yield on 2-year U.S. treasury bonds inched higher than the interest yield on 10-year treasury bonds. That rarely happens. Usually, the yield on longer-term bonds is higher than the yield on short-term bonds. After all, if people are going to park their money for a long period, they want to be compensated more for doing so.
Now here’s the part that gives investors chills. In 2018, Michael D. Bauer and Thomas M. Mertens published, Economic Forecasts with the Yield Curve. They wrote that when bond yield curves invert, a recession is on its way.
The Washington Post recently published the following chart.
The red circles indicate inverted yield curves. The shaded regions represent recessions. I don’t doubt the research. But investors should be asking one important thing: If there’s a recession, will stocks hit the skids? After all, for many investors, that question matters most.
In 2006, Richard G. Anderson wrote, Yield Curve Inversions and Cyclical Peaks for The Federal Reserve Bank’s Economic Synopsis. He listed several dates from which inverted bond yields began. Here’s every date since 1973.
I wanted to see if U.S. stocks struggled after bond yields inverted. The financial news media might not like this...because they love scary headlines. But this might calm your nerves. On average, after bond yields inverted, U.S. stocks made profits over the following 1-year, 3-year, 5-year, 10-year and 20-year periods.
How U.S. Stocks Performed After Bond Yields Inverted
|1-Year Average Annual Return||3-Year Compound Average Annual Return||5-Year Compound Average Annual Return||10-Year Compound Average Annual Return||20-Year Year Compound Average Annual Return|
* From each beginning period of inverted bond yields (1973-2006): June 1973, November 1978, October 1980, June 1989, July 2000, January 2006 Source: portfoliovisualizer.com