Pssst! Hey, buddy, look around. Stocks are still trading. The Dow and S&P 500 are only a little below their year-to-date highs. Western civilization has not imploded. You can breathe again.
Why mention this? Because if you'll recall, there was a lot of hyperventilating going on at the end of last year that the yield curve had "inverted." As my daughter might deadpan, OMG.
The pundits were telling us we were on the precipice of wrack and ruin. The economy was souring. Recession was imminent. Yet as I pointed out, we're still here.
Why should anyone care about the yield curve? I mean, other than economists and the bubbleheads on TV, what difference does it make whether a line on a graph is pointing up or down? The fact is, you shouldn't care. Ignore it! More than likely, you already do -- and that's just as well. As an investor, it means nothing to you anyway.
Yielding to ignorance
A yield curve shows the relationship between Treasury bonds of different maturities. Shorter-term notes usually carry lower interest rates than longer-term notes. Just as a bank will pay you more for your five-year CDs than your six-month ones, so too will Treasuries generally pay higher rates for longer time frames.
This is ho-hum stuff. What really gets the chatterheads chattering and your average Six-Pack Joe investor's eyes glazing over is when the yield curve inverts: Those short-term Treasuries actually pay more than long-term ones. Why would that happen? If investors have fears that the economy will tumble into recession, they might not want to take on the risk of longer-term debt. So rates on short-term bonds rise beyond those of long-term ones and, voila!, you have an inverted yield curve.
So economists, academics, and the blow-dried-hair TV announcers worry that such events presage a recession. Most recessions have been heralded by an inverted yield curve, but that doesn't mean every curve inversion leads to a recession. Last year's drama marked no such calamity -- at least not yet.
Yet even if it had, you still shouldn't care. You can't control such events, so you shouldn't worry about them -- and you certainly shouldn't change your investing style because of them. Day traders and other speculators with a short-term outlook may have to fret a bit, but if you properly have a long-term, buy-and-hold investment philosophy, just go on as you were.
A good offense
The best defense against fluctuations in the yield curve, should you be so inclined to think about it at all, is to have a well-balanced, well-diversified portfolio. By ignoring the shirt-rending and teeth-gnashing that went on at the beginning of the year, you were able to see your investment in DryShips
The benefit of broad diversification is in the reduction in volatility associated with a more concentrated portfolio. If retailer Coldwater Creek
Let the analysts analyze and the academics study. The blowhards on the tube will continue their drivel regardless of which way things are going. There is a time and a place for considering the yield curve and what its shape means, but not for you or me.
The best defense
Save regularly, invest in quality companies for the long term, and ignore everything else. You'll still be here tomorrow, and your portfolio will continue to outperform if you resist the temptation to yield to events over which you have no control.
