The yield curve has inverted: Here’s why investors shouldn’t freak out and go to cash

So last week investors, for a lack of a better term, ‘freaked out’ over the yield curve inversion, when 10-year interest rates moved lower than 2-year rates. The yield curve has inverted before, but this was the first time since 2007. Since we all know what happened after 2007 , portfolio managers and investors collectively decided we are now firmly headed for a recession and the equity world was ‘over.’ It was time to sell stocks after a nice 10-year run.

Now, suppose like in our second point the market does rise another 15 per cent. With bid/ask spreads and commissions, , you might lose another one per cent. Thus, your portfolio might be 37 per cent worse off with your ‘brilliant’ sell-before-the-recession call than it would be simply by doing nothing. Even the 2008/09 financial crisis was barely that bad. And, of course, these costs — at least the taxes, anyway — are there whether your market call is right, or wrong.

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