By: Josh Koehnen, MsBA, CFP®
Investors around the country are concerned by the appearance of the inverted yield curve in the bond market. This happens when longer-term treasury bonds produce lower interest rates than shorter-term, alerting buyers the U.S. economy may be leaning towards a recession. Typically, investing your money into long-term bonds would mean that you would get paid out more money in interest due to taking on the additional risk of being without your money for that long, whereas investing short-term would produce a lower payout since you would have your money returned sooner. The switch up of pay out in relation to length of investment has, in the past, been a precursor for an economic recession. This is causing a great deal of stress and anxiety for investors everywhere and although the yield curve inversion is certainly not something to be discounted, we don’t believe it’s time for investors to panic.
Just because this inversion has been an indicator of tough times in the past, does not mean a recession will happen immediately, if at all. In fact, it could take one or two years before a recession takes hold, meaning we have plenty of time to prepare accordingly. Recessions are a very normal part of the economic cycle and not every recession is destined to be as severe as the Great Recession of 2008. The key to surviving these periods of economic downturn is to first understand that they are inevitable and then to prepare yourself. There are three ways that we think could potentially help you be better prepared: 1) rebalance your overall investment portfolio to make sure it matches up with the amount of risk you initially indicated you were willing to take on as part of your long-term plan. 2) make sure you have built up an adequate emergency cash reserve in case your income is disrupted. 3) pay off or pay down any high-interest debts, such as credit cards or student loans. Although the inverted yield curve may cause lots of media discussion and some discomfort, if you prepare correctly, any type of recession can be manageable.
Investment Advisor Representatives offering advisory services through Premier Wealth Advisors (PWA), a registered investment adviser. Securities and additional advisory services offered through Independent Financial Group, LLC (IFG), a registered broker dealer and a registered investment adviser. Member FINRA/SIPC. PWA and IFG are unaffiliated entities.