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In Investing, Don’t Sweat the Small Stuff – The New York Times



It is easy to obsess about the smallest parts of your portfolio, like the tiny amounts of interest spun off by money-market funds today. Don’t waste your time.

It isn’t worth agonizing over financial decisions that don’t matter.

That’s obvious, I know. But it took me a long time to get there.

First, I spent an interminable time on a hopeless task: figuring out how to get the best possible return on my cash holdings at today’s minuscule interest rates.

Let me describe what I went through, so you don’t have to.

As part of my twice yearly examination of my investment portfolio, I rebalanced my stock and bond mutual fund holdings. The S&P 500 has climbed about 14 percent since Jan. 1, leaving me with more money in stocks than I prefer.

This financial chore was worth the effort. How you divide your money among stocks, bonds and cash is one of the biggest investment decisions you can make. You are calculating how to get the maximum return with the least amount of risk.

Investors’ asset allocations can be as unique as they are. My risk tolerance is probably slightly higher than average for someone my age (66). I like having about two-thirds of my assets in stocks, but the recent run-up in the market put me beyond my comfort level.

So I moved some of my stock fund gains to bond funds. That enabled me to get my investment mix back to 65 percent in stocks and 30 percent in bonds, the configuration I believe is right for me.

Determining the best way to get back to that allocation took me less than an hour.

All I had left to do was deal with the 5 percent of my money that I keep in cash — really, risk-free, interest-bearing accounts of one kind or another. Even though this was a tiny part of my portfolio, I wanted to figure out how to get the highest return possible. How hard could that be?

Extremely, as it turned out.

I went in thinking I would put the cash in a tax-free money-market fund. It would be safe and instantly accessible, which was important to me, since the cash component of my portfolio doubles as my emergency fund. I knew I wouldn’t earn much in interest, but I thought I could live with that.

It turns out I couldn’t.

For the last 12 months, the highest yielding tax-free money-market fund I have found paid 0.15 percent. OK, fine, I sighed. But agreeing to that tiny amount in the abstract is one thing. Seeing what it meant in reality was something else.

Say you have $50,000 in cash earning 0.15 percent. Your annual yield will be $75, or $6.25 a month. That return was just too small for me to accept.

I searched (and searched and searched) for alternatives. Taxable money-market funds yielded about the same, after tax, as interest-free municipal money funds: 0.15 percent for the past year. Certificates of deposits that paid more would tie up my money for more than a year, so they were out. To be a true emergency fund, the money needs to be immediately accessible.

I would have to take more risk to get a higher yield.

Mortgage-backed securities, which are composed of home loans bought from the banks that issued them, make me nervous because the ones filled with subprime loans were at the heart of the 2007-8 financial crisis. I worry that banks will loosen their mortgage standards again and resume making risky loans, hurting investors.So funds containing mortgage-backed securities were out, too.

I-bonds, a government security, were appealing. They offer two kinds of dividends, a fixed rate for the 30-year life of the bond, plus an adjustment to offset inflation. But I didn’t like the restrictions: You have to hold them for at least a year or pay a penalty.

I even thought of taking my cash and paying down the mortgage on our home, figuring that would save me the equivalent of 2.875 percent a year — our current mortgage rate — but that didn’t seem to make much sense, given how low our rate is. Plus, it would eliminate my emergency fund.

I decided to put half my cash in a taxable ultrashort bond fund, which invests in bonds with very short-term maturities.

The yields on the ultrashort bond funds from Fidelity, JP Morgan and Vanguard — three of the ones I examined — ranged from 1.42 percent to 1.62 percent over the past year. I bought Vanguard’s, which invests in securities that mature in less than a year and had an after-tax yield higher than that of the relatively few tax-free short-term bond funds I found.

No, it was not really cash in the way money-market funds are — the underlying securities fluctuate in value — but it was close and would increase the yield a little.

I put the other half in a low yielding tax-free money-market fund. You can find such funds at just about every major brokerage house.

Proud of my decision, which took a full day to achieve — a day when I could have done some work, called my kids, gone for a long walk and sneaked in a nap — I examined how much I would gain from all my effort.

The answer was not much.

Here’s what the numbers looked like, based on an investment of $50,000. (I’m using that number for simplicity’s sake.)

Half the money went into the ultrashort bond fund, which returned 1.56 percent over the last year. The yield on that $25,000 invested at 1.56 percent is $390. The other $25,000, in the money market fund paying 0.15 percent, generated just $37.50.

When I added it up, I found that the total yield on $50,000 would be $427.50.

Even that was generous. My calculations were based on the average over the last 12 months, but the situation has gotten worse recently. The municipal money-market fund yield today is exactly zero, and the ultrashort bond fund pays 0.28 percent. So, more realistically, my total return is 0.14 percent, or only $70. That’s 90 percent less than it would have been a year ago. It’s just plain awful.

All my effort resulted in virtually no potential gain.

My unhappy takeaway is that trying to bolster the yield on savings, given today’s interest rates, doesn’t pay off. Some things really matter. But in this case, the adage is really true: Don’t sweat the small stuff. You have better ways to spend a day.

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Goldman and DWS prepare bids for NN Investment Partners – Financial Times



Goldman Sachs Asset Management and Germany’s DWS are preparing bids for NN Group’s investment management arm as consolidation in the industry gathers pace.

The Dutch insurer said in April it was considering a sale of NN Investment Partners, which has €300bn in assets under management.

The deadline for final binding offers is Monday. GSAM, which has more than $2tn in assets under supervision, and Frankfurt-based DWS are still in the sale process and preparing bids, said people familiar with the situation.

The deal price is in the region of €1.4bn, one of the people said. NN Group, GSAM and DWS declined to comment.

UBS Asset Management, Janus Henderson and US insurer Prudential Financial are among those to have previously registered their interest. All three declined to comment.

Investment managers globally are embarking on mergers and acquisitions designed to shield profits from rising costs and falling fees, while seeking to tap into fast-growing markets such as passive investing, private assets and ESG, and open up new distribution channels.

“The competitive environment for traditional active asset managers has intensified and a smaller group of larger players are now dominating the institutional segment,” said Vincent Bounie, senior managing director at Fenchurch Advisory, a specialist investment bank for financial services.

“It has become complicated to grow and very difficult to have a profitable business, in particular if you have undifferentiated plain vanilla products.”

Asoka Woehrmann, chief executive of DWS, which is majority owned by Deutsche Bank, told shareholders at the €820bn group’s annual meeting last month that it wanted to be “an active player” in industry consolidation. It is seeking further scale to challenge rival Amundi for supremacy in Europe.

Meanwhile for insurance companies, a prolonged period of low interest rates and higher capital requirements under Solvency II rules is prompting groups to weigh up where they allocate their capital, Bounie said. “For many of them, subscale asset management divisions are no longer core activities and there will probably be more divestments.”

NN Group, which is based in The Hague, came under pressure last year from activist hedge fund Elliott Management to improve returns and streamline its operations. It said in April it was considering options including a merger, joint venture or a partial divestment of the division.

NN Investment Partners has about 950 employees. Of its €300bn in assets under management, two-thirds is managed on behalf of its insurance parent company with the remaining third run for external investors.

The division’s range of funds covers fixed income, equity, multi-asset and alternative investment strategies. It has a strong position in ESG investing, notably in areas such as green bonds, impact equity and sustainable equity.

Additional reporting by Ian Smith in London

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Condo Smarts: Existing buildings can be good investment – Times Colonist



Dear Tony: We are retiring this year and considering downsizing to a condo. We have started looking at both new and existing properties around Vancouver and Victoria, but we encounter challenges with both options.

New developments are often available only through presales and the time periods for completion would require us to sell, rent until the property is ready, and with few assurances of completion dates would require us to move twice with no guarantees how the properties would be managed or how fees would be structured for long term operations.

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Existing buildings are more attractive; however, we find most properties are sold within days of listing, and there appears to be more of a concern by realtors to keep strata fees low rather than looking at the age of the buildings and the long-term maintenance to protect owner investments.

Are there any standards or consumer rules we might consider following? As new buyers into a condo lifestyle we would like to avoid a sinking investment.

Karyn and Jerry W.

There are many existing buildings and communities that are an excellent investment. They are easily identified by reviewing the financial reports, investments, a depreciation report completed by a qualified consultant or reserve planner, and by reviewing the minutes of the strata corporation to identify how they address maintenance, planning and funding for the future.

While every building has different amenities, staffing and servicing requirements, an annual budget that identifies all the service contracts for maintenance and operations is a significant asset. An active use of the depreciation report to plan for future renewals and major maintenance components is a healthy indication of a well managed property.

Low strata fees are problematic for strata corporations as they often indicate a community dependent on special levies. Special levies require a 3/4 vote of owners at general meetings and many owners vote against a special levies generally due to affordability issues. The result of failed special levies is deferred repairs that will only rise in cost and damages, and the potential for court actions or CRT orders.

There is also a direct link between low strata fees, deferred maintenance and renewals, and higher risks for insurers. This results in higher insurance rates and deductibles for strata corporations.

Buyers should always request copies of depreciation reports, any engineering and environmental reports, minutes of annual meetings, the bylaws and rules of the property, copy of the strata insurance policy, and a Form B Information Certificate, which will also identify any courts actions or decisions against the strata corporation. Read all documents and discuss any issues with your realtor and lawyer. This should help separate the well managed buildings vs the buildings at risk.

New construction in some ways is easier to manage as the strata corporation is enabled to make the right decisions that will impact funding and future operations. Owners can have a direct effect on their investments by joining and supporting the newly formed strata council and making decisions that ensure a well funded and planned operations plan.

Strata fees for new properties often start low in the first year as there are service contracts included with the new construction that are included in the warranty period and some developers will entice buyers with low costs. Plan on an increase of fees once all units are occupied and the strata corporation is fully serviced for operations and maintenance.

This may be impacted by insurance costs, staffing, and consulting for warranty inspections, legal services and the management of warranty claims, the commissioning of a deprecation report, and operational requirements.

Every building, which consists of endless components, will have failures. The effective management and planning of those issues when they arise is the true test of a well managed property. Product failures and installations are often beyond anyone’s control; however, a well funded property will also be able to respond without a significant crisis for owners.

Tony Gioventu is executive director of the Condominium Home Owners Association.

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Investing inside a corporation: what you need to know – MoneySense



FPAC responds:

Congratulations on your successful retirement! At a stage when most people are focussed on decumulation, you’re asking about establishing an approach for long-term, tax-efficient investing inside your corporation. Let’s walk through these important considerations:

Investment decisions: robo-advisor or DIY—and ETFs or bank stocks?

A robo-advisor is a great choice for automated, tax-efficient and low-cost investing. A robo-advisor will be able to set you up with a portfolio of low-cost, widely diversified ETFs. Regular rebalancing, quarterly reporting and ease of use will make this option attractive if you are looking for a hands-off approach. Most of the leading robo-advisor platforms in Canada will help you set up a corporate account. 

If you’re comfortable being a little bit more hands-on, you might consider implementing a multi-ETF model portfolio. This approach will require you to open an account at a brokerage and do some regular investment maintenance, including allocating cash, reinvesting dividends and rebalancing

Alternatively, you could also consider implementing an asset-allocation ETF solution. These “all-in-one” ETFs are available in different stock/bond allocations to suit your risk preferences, and they are globally diversified. 

You mention tax-efficiency being important to you. Broad index-based ETFs track an underlying market index. The stocks and bonds in these indices do not change often, so there isn’t a lot of buying and selling of stocks—also known as “turnover”—happening inside of your ETFs. A portfolio with low turnover will not stir up a lot of unwanted capital gains in years that you don’t want to take money out of your accounts, and less turnover means less tax payable year-to-year, leaving more of your money working for you. All in all, tax efficiency is a huge benefit of an index fund ETF approach to investing, especially if you’re investing inside of a corporation. 

You also mentioned bank stocks as an alternative. I can understand the appeal of this approach, as buying stocks of Canada’s large financial institutions has proven to be an effective strategy over the past several years. Unfortunately, the past performance of any investment strategy does not tell us much about its performance in the future. And, in the case of bank stocks, your investment will be very concentrated on a single sector, in a single country. This approach to investing carries risks that can be easily diversified away by using broad, globally diversified index-based ETFs. (In fact, Nobel Prize laureate Harry Markowitz famously called diversification “the only free lunch in investing.”)

Understanding the ins and outs of corporate investing

Investing inside of a corporation can be complicated. A corporation is taxed differently than an individual in Canada. As individuals, we are taxed based on a progressive income tax system, meaning higher amounts of income are taxed at higher rates. In your case, if you are earning (or realizing) a lower income in retirement, your last dollar of income is likely taxed at a lower rate than it was while you were working. When you combine lower tax rates with other benefits that the tax system provides to seniors—such as pension income splitting and age credits—it is possible that you will not be taxed at the high end of the marginal tax table in retirement. 

Passive investment income generated inside a corporation, on the other hand, is taxed at a single flat rate of around 50% in Ontario, or close to the highest marginal tax rate. Passive income tax rates are so high because the Canada Revenue Agency (CRA) doesn’t want us to have an unfair tax advantage by investing our portfolios inside corporations.

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