One way to evaluate whether it’s worth investing in high-yield bonds is to look and see how the high-yield bond market has performed over time, as compared to market indexes like the S&P 500. When you look at the data, you’ll want to consider a variety of factors, including how long you plan on holding onto the bonds, and how risky your current investment strategy is. The table in this article shows the returns for the high-yield and investment-grade bonds indexes alongside the S&P 500 stock index, beginning in 1987.
Historical Performance Data of High-Yield Bonds
The data below reflects the total return. The data used for high-yield bonds was the Bank of America US High Yield Index, and the data used for investment-grade bonds is the Bank of America US Corporate Index. The S&P 500 data includes the dividend yield in the total return. If you’re considering investing in high-yield bonds, you’ll need to keep in mind that the yield is promised, not guaranteed. High-yield bonds are typically issued by companies that are more likely to default. Although high-yield bonds typically weather inflation better than investment-grade bonds, they are more vulnerable in economically tumultuous times, since the companies that issue them may not be able to handle recessions or economic downturns.
Diversify Your Portfolio
If you decide to invest in high-yield bonds, make sure they aren’t the bulk of your investing strategy. You should have a variety of investments, including stocks and investment-grade bonds. That way, if one of your investments is more vulnerable, the rest of your portfolio can help mitigate any losses.
The Bottom Line
Clearly, there are situations in which high-yield bonds can be more profitable than investment-grade bonds. If you want to invest in a high-yield bond, you should do the necessary market research, which includes reviewing the risks of buying an individual bond, the company’s financial condition, and the economy in general. You’ll then want to determine if the risk of default is lower than the yield the company is offering,
