A Conversation with EP Wealth Advisors Director of Portfolio Strategy - Adam Phillips, CFA®, CFP®
Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA®), a CERTIFIED FINANCIAL PLANNER™ (CFP®), and has been included on the Forbes Next Gen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.
Analysis is More Challenging When You're Buying Bonds
Unlike the stock market, the bond market is not as transparent as we’d like. Stocks, particularly of large-cap companies, are traded in huge numbers of shares every day. Price information is easy to come by as a result. Unlike stocks, many bonds can go days or even weeks without trading.
How are Bonds Priced?
Also unlike stocks, buying bonds in smaller lot sizes—for example ten bonds—can cause you to take a pretty big price hit compared with what you might pay if you were purchasing a lot size of fifty or a hundred bonds. This is why when we construct a bond portfolio, we ensure it’s large enough to buy these larger lot sizes while also investing in enough different bonds to provide diversification.
Information is Key in Bond Pricing
Because larger institutional companies often can get better prices on bonds, we use a number of tools to help level the playing field. Resources such as Bloomberg provide trade-order history on individual bonds. Investing directly through electronic trading platforms lets us see what different dealers are offering—often, they’re offering the same bond at very different prices. Because we can see the markup they’re making, we can negotiate to add bonds to our clients’ portfolios at lower cost.
The Two Ways to Assess Yield
Investors typically gravitate to bonds because they want income and safety. But the two different ways of maximizing yield each carry risks of their own.
Longer-term bonds normally offer higher rates than shorter-term bonds. But they’re also subject to the threat of rising interest rates, which cause the price the bond trades at to decline.
Lower-rated bonds with less credit quality also pay higher rates. But this is because of their greater risk of default. In maximizing yield on behalf of our clients, we focus first and foremost on credit risk. When we buy a bond, we look at its credit rating, as well as its rating history and any potential actions that may affect it. A bond that looks good now might be facing a potential downgrade by one of the major ratings agencies. Credit quality is where research can reveal red flags that may prove costly.
How Can You Benefit from a Strategic Approach to Investing?
With a staff of professionals and access to sophisticated analytical tools, EP Wealth offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors.
This is #11 in the Informed Investor “How to Build Your Investment Portfolio” series. Other topics include Asset Allocation, Why We Diversify, How to Buy a Stock, The Types of Investment Risk, Concentrated Positions, etc. For more information on our investment process, check out our investment management page or ask for a Portfolio Review.
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