Ready for this week’s retirement investing pop quiz?
In what kind of bonds should you invest the fixed income portion of your portfolio if you thought that a huge economic downturn was just around the corner—U.S. Treasurys or High-Grade Corporate Bonds?
The standard answer from most financial planners is the former. Their theory, which certainly is plausible, is that during economic crashes investors dump all risky assets—including corporate bonds—in favor of the safety of U.S. Treasurys. But few, if any, of these financial planners have actually analyzed the historical record with sufficient detail to verify this theory.
Edward McQuarrie has just done this work for all of us. He is a professor emeritus at the Leavey School of Business at Santa Clara University who has spent years reconstructing U.S. stock and bond market history back to 1793. In a 200+ page study he just posted on the Social Science Network, he corrected for errors that previous researchers have made in calculating bonds’ returns over the last two centuries.
One of the fascinating insights he got from his research was the surprisingly strong relative performance of high-grade corporate bonds during the Great Depression and the Great Financial Crisis. “I found that a corporate [bond] portfolio launched in January 1929, or in January 2008, outperformed a portfolio of long Treasury bonds if held until after the crisis passed,” McQuarrie told me in an