Welcome to another installment of project “passive wealth,” where I will be releasing my next book on investing (working title: “The Rational Investor”) chapter by chapter to paid subscribers of Making of a Millionaire.

You can catch up on previous chapters of the book here.

Pre-order your copy at a discounted price ahead of the October 17th release date here.

Chapter 27: Should you care about an inverted yield curve?

There’s no shortage of scary investment narratives the financial media and stock market gurus will use to scare you into giving you their attention — and your money. Over the next few chapters, we will review what the data says about some of the most commonly recurring scary investment narratives.

One of those narratives is the “inverted yield curve.” This is when shorter-term bonds have higher yields than longer-term bonds — which is the opposite of a “normal” yield curve where longer-term bonds have to pay more interest to get you to commit your principal for a longer period.

The reason you hear so much about an inverted yield curve when it happens is that an inverted yield curve has preceded every economic session since 1955.

Should you care about an inverted yield curve if you have money invested in the stock market?

The stock market is not the economy

An inverted yield curve and the implication of a future recession is catnip to the financial media. Especially for stock market gurus who make their living pretending they know what is about to happen in the market and what moves you should make with your portfolio to stay ahead of the game.

When the yield curve inverts, many pundits will tell you it’s time to start selling stocks, which makes intuitive sense. If the inverted yield curve implies an impending recession, why not dump your investments today to avoid a market crash in the future?

There are many reasons why a rational investor would avoid this kind of knee-jerk reaction, but let’s focus on a specific reason; the stock market is not the economy!

A possible recession at some point in the future does not mean stock prices are about to plummet.

Fama and French take on the inverted yield curve

The question that should concern investors is if it makes sense to sell stocks when the yield curve inverts?

Making of a Millionaire

Should you care about an inverted yield…

Comments on this post are for paid subscribers