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We all know what the word 'yield' means. It tells us how much we can expect to get - or earn, in some cases - for our investment. This could refer to planting seeds, investing money or many other situations. If we invest money in stocks of some kind, the yield we get will be the amount of profit we make on that investment. But what about an inverted yield curve - and what does it mean for stock investors?
Imagine a graph where the curve gradually goes upwards - signaling better returns the longer you keep your investment in place for. Now imagine that curve flipped over from top to bottom, so that what was a gradually climbing curve now shoots upwards quickly before dipping down again. This is what we call an inverted yield curve.
Now you can see from this that such a curve means you will see some nice profits from your stock investment in a very short space of time. But the longer you leave your investment in place, the lower those returns will go. In fact, it would be in your best interests to bail out early instead of waiting for better returns - because those better returns probably won't materialize.
So where does this leave you? Are these curves bad for your investments, or is there more to this than meets the eye?
In truth they aren't bad at all. The only thing you need to remember is to monitor your investments to see if you can spot any inverted curves as they reach the peak of their cycle. This is when you need to bail out, otherwise you will not realize the best potential and returns from those stocks.
These curves are closely tied in with interest rates too. Indeed it has been proven in the past that a curve of this nature can be a precursor to a recession. It doesn't always happen, but it happens more often than not to be down to just chance.
You need to think about short term and long term when it comes to those rates. The short term ones are habitually lower than the long term ones, but when that gets flipped on its head, we see an inverted curve.
So if you are thinking of investing or you already have some investments in place, remember the inverted yield curve and keep an eye out for it. It could save you from losing money.
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