Investors are often led down the path that they must invest in equities in order to generate a decent return, and that the high yield market is too risky and speculative. However, reality and the data points suggest otherwise. Looking over the past couple decades and various periods in between, you can see that high yield has outperformed the equity market (as measured by the S&P 500 Index) on a risk adjusted basis (return/risk) over the past 5, 10, 15 and 25 years, and performed equivalently over the last 3 years.1
Sources: J.P. Morgan; Bloomberg. Data as of 11/28/2014.
2 Annualized returns divided by the annualized standard deviation of return.
Here, risk is defined as standard deviation, or volatility of returns. Even taking into account the enormous technology and internet rallies of the late 1990’s, high yield bonds have performed only slightly lower than equities over the past 25 years, but with nearly half of the risk (standard deviation), for a significant risk adjusted outperformance.3
