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Persistence and Perspective Through Drawdowns

By Derek Moore

Source: JP Morgan Guide to the Markets

This is one of those articles where a picture can tell 1000 words. So, in keeping with that idea, we will put some color around what your seeing above in the chart to help visualize how different parts of markets move up or down through the years.

You can click the image to enlarge it for better viewing. This is what is called a periodic table of market returns.   The X axis is years starting with 2005 to 2019.   The Y axis is return for that particular year by investment type (High Yield bonds, Corporate grade bonds, etc.)   

Many have asked recently after not only the selloff in equities, but also in the high yield space whether that is likely to recover. ZEGA uses high yield ETFs in our ZBIG and Buy & Hedge Retirement strategies as a source of yield. In Buy and Hedge the high yield position has a hedge on it so exposure is limited. However, in ZBIG, it is the primary risk within the strategy. So, when high yield shows lower prices in short-term moves of less than a year, those accounts reflect it. As such, we thought pointing out some historical data of high yield within the bond asset class might provide some longer-term perspective.

As many regular readers know, we are reticent to make predictions. But when you look at the graph above, which shows various parts of the fixed income bond space, sometimes the best performing sector one-year winds up being the worst the next year. Or vise versa.

You can see different areas of the markets including TIPS (Treasury Inflation Protected Securities), US Aggregate Bond Index, Mortgage Backed Securities (MBS), US Treasuries, and High Yield Bonds. So, while past performance is off course no indication of future results, I have circled in yellow the annual returns for High Yield from 2005 through the YTD in March. Since then we know that High Yield has recovered and is now only down about -7.5%. YTD.

But you can see that back in 2008 it was the worst performing at down -26% only to become the best fixed income sector up +58% in 2009 and another +15% in 2010. Again, that is what is happened, and no guarantee what will happen. But it is instructive and informative to get some historical perspective.

Recently Charles Schwab himself appeared in a Schwab commercial talking about persistence when it comes to investing. All the ups and downs throughout history. If you have not seen it or need a good reminder check it out below:

Source: Schwab YouTube Channel