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21 November, 2018

The Flat Out Truth

There are two major components of most investment portfolios, equity (shares in companies), and bonds (money lent to Governments and companies).  The attractiveness of a bond (its price) is governed by its quality, and by the rate of interest paid to investors (the yield).  Traditionally you get paid more if you are willing to lend your money for longer, and this makes sense to most investors.  Sometimes however the 'yield curve' a graphical representation of the rate of interest you get for different bond terms flattens, or even goes 'negative' (a negative yield curve means you're getting paid less for lending money for longer).  The received wisdom has always been that a flat or negative yield curve is seen as an impending warning for stockmarkets.  However in these data driven days a lot of assumptions like this are being tested, and many 'pearls of wisdom' are turning out not to be quite as wise as we all thought.

Here a piece of research from the analytical team at Dimensional Fund Advisers examines this work, to see whether the traditional wisdom holds up, or is one more prejudice to release investors from.

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by John Stirling

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