Are Corporate Bonds Worth Risk?
It’s important that investors understand all risky assets can experience long periods of underperformance.
My favorite example that makes this point is that, for the 40-year period from 1969 through 2008, the S&P 500 Index returned 9%, and so did 20-year Treasury bonds. Making matters worse, while producing the same returns as long-term Treasuries, the S&P 500 experienced far greater volatility—its annual standard deviation during the period was 15.4% compared to just 10.6% for Treasuries.
That equities could underperform Treasuries for 40 years surprised many people, but it shouldn’t have. No matter how long the horizon, there must be at least some risk stocks will underperform safer investments.
Another risk premium also failed to appear over this same 40-year period, one that has received far less, if any, > SEE MORE
Munis Increasingly Risky
While I could provide an almost endless list of forecasts that went wrong from so-called experts, among the most infamous was surely Meredith Whitney’s December 2010 forecast of between 50 and 100 “significant” municipal bond defaults, totaling “hundreds of billions of dollars.” In March 2011, noted economist Noriel Roubini jumped on Ms. Whitney’s bandwagon, predicting $100 billion in defaults over the next five years. Such forecasts led to massive withdrawals from municipal bond mutual funds.
The massive scale of problems that Whitney and Roubini anticipated didn’t occur because many (though far from all) governments took actions to address the problem, cutting spending and raising revenues.
However, investing in municipal bonds is riskier than many investors may perceive, with last year’s $74 billion default by Puerto Rico providing a reminder. There have been other significant ones in recent years, including > SEE MORE
The S&P 500 Goes Supernova
I think most investment professionals are generally aware of how well the S&P 500 has done relative to virtually every other asset class since the end of the global financial crisis (GFC). A bit more precisely, the S&P 500 is up 352 percent from March 2009 through October 2018 while international developed stocks, emerging markets stocks and bonds are up 140, 142 and 39 percent, respectively. What you might be surprised to know though (I certainly was) is that it’s almost impossible to simulate another same-length period where the S&P 500 had better risk-adjusted returns. In other words, saying the S&P 500 has done well during this period is a gargantuan understatement. As we will see, it’s done so well that it’s reasonable to ask whether anyone alive will ever > SEE MORE