Fortune favors the bold, and so does misfortune

The figure below illustrates a truth that most investors know, but tend to forget. Taking high levels of risk in the financial markets increases the tail probabilities, which are associated with massive gains and massive losses. The lure of high-risk decisions and related investment instruments often acts as a sort of tax on the statistically illiterate.

But investors can reduce the chances that they will end up at the left tail end of the probability distribution. When it comes to stock investing, paying attention to two events can help. The first is the percentage difference between 10-year and 3-month U.S. Treasury yields falling below zero, because a U.S. recession tends to occur within the next 18 months.

The second is the stock market, measured by an index such as the S&P 500, reaching a double-top within that that period of 18 months after the percentage difference between 10-year and 3-month U.S. Treasury yields falls below zero. This combination is extremely bearish. And this is where we are about now. The video linked below discusses this in a bit more detail.