Brian Jones discusses the 4 main reasons CJM uses bonds inside client portfolios.

Brian T. Jones, CFP®
Brian T. Jones, CFP®Chairman, Financial Adviser, Principal

Hi, I’m Brian Jones and I’m one of the principals here at CJM Wealth Advisers. And in this episode, we’re going to be talking about bonds and in particular, how we use bonds at CJM inside client portfolios for more than just income. Now at CJM, we use bonds for four primary reasons. The first is income. The second reason why we use bonds inside a client portfolio is diversification from equities. The third reason is capital preservation, and finally, we use bonds as a hedge against inflation. Now, the primary reason why we use bonds inside a client portfolio is income. Once clients are retired and no longer collecting a paycheck from their former employer, we need some way of helping to generate an income stream in retirement. We use the bonds inside the client portfolios and all of the dividend payments that those bonds make, to help supplement that income stream that we replicate for the clients inside their portfolios.

That is the primary reason why we have always used bonds here at CJM. Now, the second reason why we use the bonds inside the client portfolio is because bonds are different than stocks. And we use them for diversification. We know that when we look at assets, especially as we look at assets over long periods of time, we know that any investment will go through periods where it performs better than others, and there will also be times when it doesn’t perform as well as expected. As my father always told me in the business, no tree grows to the sky.

So we use the bonds to kind of round out any well allocated investment portfolio for a client. So that’s the second reason why we use bonds inside a client portfolio, we use them for diversification purposes. Now the third reason why we’ll use the bonds inside a client portfolio comes down to capital preservation. Over multiple decades in business, we have learned that a portfolio that is 100% in equities, will be more volatile and will lose more money than a client’s portfolio that has maybe only 70% in equities. and the other 30% in a high quality bond portfolio.

Such was the case in March, 2020 this year, when the markets were down significantly. And what we found was clients that had a higher degree of equities inside their overall portfolio were down more in the short term, than clients who had maybe more of a fixed income allocation, i.e., bonds inside their overall portfolio. So that’s the third reason why we use the bond, we’re trying to preserve as much of the portfolio at certain points and times because we know that markets get volatile, especially over the long term.

Now, the fourth and final reason why we use the bonds inside the client portfolio, comes down to the fact that in some cases, the bonds can be a hedge against inflation. What that means is we know that a dollar today in 2020 will not buy the same level of goods as it will in 2030 or even 2040. So if we can have bonds that are correlated to the rise in inflation and maybe as their interest payments will inflate upwards to protect the client’s purchasing power, we know that that’s a good long term investment, especially on a net basis when we factor in the rise in inflation over time.

So just to recap, the four reasons why we use bonds inside the client portfolio. Number one is income. Number two is diversification. Number three is capital preservation. Number four is a hedge against inflation. And those are the four reasons why we use bonds inside client portfolios. Now, if you have any questions about your own bond portfolio, you have any questions about some of the strategies that CJM has deployed inside your own client portfolios, please give us a call, send us an email, and let’s find a time where maybe we can schedule a video conference just like this, and we can review your own portfolio in greater detail. I’m Brian Jones and thanks for watching.