I am not going to do a review of their service (since I didn’t get paid for it ) but I will use the example of Chris, one of the two readers, to illustrate which kind of question you should ask a financial advisor when they approach you with such leverage strategy.

What is the strategy?

Chris and his partner make 150K and have a free mortgage property worth 400K. They have been approached by TDMP in order to leverage over their property. This sounds a lot like a Smith Manoeuvre strategy but it is called that tax deductible mortgage plan. The projection was based on a “income fund” providing 8% return per year. So if you have bad debts (i.e. non tax deductible debt); you pay them with your investment returns and you re-borrow the money to invest again. Therefore, you are switching bad debts into good debts.

Hum… let’s say you pay 4.75% (prime rate) on a loan where the interest are tax deductible (therefore a net charge of 3%) and you make 8% per year with your portfolio. This sound very interesting isn’t? Well I don’t think that things can be that easy!

What are the fees and why should I pay them?

According to both readers, TDMP charges $39 a month for the administration fee of the whole setup. While this sounds to me like another hidden / other fee that company charges to improve their profit margin, they may do extra stuff for their client too. Even thought $40 a month seems a lot (since you are still paying interest on the loan and MER’s for your investment), I told Chris to ask them what were they doing for so much a month. An added value would be to keep track of the client’s investment record and interests charged along the year in order to facilitate the completion of their tax report.

In which kind of investment portfolio the leveraged money will go into?

I think this part is a big must as it will determine if you will end-up as the king of the leveraging or another poor victim from “evil” advisor bringing their clients blindly into the abyss of madness.

In Chris’ case, the broker didn’t give much information the first time besides the fact that it will (will? Never use this word as a financial advisor) give a 8% return according to past performance. I must admit that this is kind of odd. The first thing would be to determine the client’s investment profile instead of offering a one fits all fund. Anyway, there is no such thing… regardless the past performance of the fund. Based on that premise, we should all sell Sprott Canadian Equity Fund that has an astonishing record. However, the fund also went down badly a few times since its inception as well!

I guess the main point I am trying to make with this post is do not sign leverage proposal on the first meeting and come back with a lot of questions for the second meeting. My conversation with Chris was obviously lengthier but in the end, it will lead to a second or maybe a third meeting where fundamental questions must be answered. Good luck to you my friend!

If you liked this article, you might want to sign up for my FULL RSS FEED. Then, you would get my daily post in your email and can read it at any time. To subscribe, please click HERE.

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Related Post

Unfortunately for them, those who decided to stop eating because the ice cream was not as great as usual are the one you will miss the delicious chocolate sauce sitting at the bottom of the cup (man, I feel I’m in the middle of a Dairy Queen’s commercial!).

If you don’t have much debt, I would strongly suggest using your extra cash flow in order to setup a systematic investment strategy. This will boost your investment portfolio as you will have the possibility to buy more shares for the same price. Once it is set, you will simply have to let the power of compounding interest do its magic.

Another great thing about systematic investments is that you don’t feel market fluctuation that much. The reason is fairly simple. If you invest $500 per month and your portfolio lost $1000 last trimester, you will see your global investment increasing by $500 when you receive your statement.

Of course it is not real growth; it’s the money that you put in during 3 months! However, even though you still loss a $1000, you are not feeling it that much as the global overview seems positive. This will only help you out managing your emotion in times of high market fluctuation.

This is a right timing for leveraging strategies

If you didn’t have stroke recently, you may want to dive into the banana split cup like it’s your last meal by borrowing to invest. The next year might be a bit rough as nobody knows when the madness will stop. However, one thing is for sure; the madness will come to an end. I saw people who leverage at the beginning of 2003. A year before, we had Enron, Worldcom, Tyco and friends that were forging their financial statements. Investors were totally depressed and still, some people leveraged in 2003. Guess what, they are laughing today as they are +80%, +100%

So the bottom line is that we are in a perfect moment for investing and even better for leveraging!

image source: estb.msn.com

If you liked this article, you might want to sign up for my FULL RSS FEED. Then, you would get my daily post in your email and can read it at any time. To subscribe, please click HERE.

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Related Post

Option #1: Full RRSP contribution

If Peter would to invest $300 a month over a period of 30 years, he would end up with $450,088. Over that period, we would also receive the sum of $1440 in tax return every year. If he would to invest this sum in a non-registered account, he would create an additional $176,178. However, Peter must keep in mind that he will have to pay taxes on the 450K in RRSP at the time of withdrawal. The marginal tax rate will be much lower on his non-registered investment.

Option #2: RRSP contribution plus an investment loan

At a borrowing rate of 7%, Peter would be able to borrow 30K to invest and his monthly payment (interest only) would be of $175 per month. Therefore, he would still get $125 to invest into his RRSP each year. This strategy would bring $301,879 in non-registered investments (including the 30K loan) and $187,536 in RRSP. This brings us to a total of $459,416 once we pay the investment loan. In Canada, the interest paid on an investment loan is tax deductible, therefore, Peter would receive again the same $1,440 that could be invested the same way as option #1. You may think that the whole strategy doesn’t really worth it as it creates only an additional 9K. However, you have to take into consideration that you have $301K sitting into a non-registered account.

Option #3: Registered and non-registered contribution

If Peter doesn’t believe in leverage strategies and still wants non-registered investment, he could invest $175 per month into a non-registered account and $125 into his RRSP. This would give him $450,088 but with much less tax return per year ($600 instead of $1440).

I would like to get back to option #1 and #2 one last time. Imagine that Peter’s marginal tax rate on his RRSP withdrawal his still 40% and 25% (capital gains, dividend, interest income mixed together) on his non-registered investment. If he would to cash in all his investment in one shot, the option #1 would give him $402,186 (450K*60% + 176K*75%) while option #2 would give him $448,565 ((301K-30K)*75% + 176K*75% + 187K*60%). Therefore, a small 30K investment loan would increase your net investment by 45K. This is the magic behind all the different ways of using your cash flow!

If you liked this article, you might want to sign up for my FULL RSS FEED. Then, you would get my daily post in your email and can read it at any time. To subscribe, please click HERE.

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Related Post

Markets are going down and I expect everybody with a brain to invest their available liquidity in the following months. I know, this is not the first time you hear that, but people just do not listen! If you are a bit gutsy, the best time for leveraging might come pretty soon. Yeah, I think we should all borrow money to invest if things continue to go down this way. Why is that? Here are a few reasons:

Markets will not go down forever

Right now, markets are being influenced by the subprime lender crisis (Keep in mind that I called this one back in April!). As we are living in a bull market for several years, most stocks are at their highest peak, everybody thinks this is the end of the party and the bear will not take time to show up. I could not disagree more on this statement.

First, Sub-prime lender crisis is mainly affecting the US market. The impact is being reflected across the world but mostly because people are in panic mode. Do you see any major sub-prime lender in financial difficulties in Canada right now? We presently show the best economic stats since the pas 30 years. Our economy is driven by the prices of resources but the world is craving for it!

Second, the BRIC should not slow down their economic progression. It is especially the case for India and China. Buildings are being built faster than I type my posts! I recently saw some stats about India and it is ridiculous to see the amount of engineers and doctors they are producing years after years. I do not think they will stop buying our resources any time soon.

Third, technical analysis shows that the bull market is not over yet. We are just living another market correction. This is exactly the time for a buy and hold strategy.

What if I am wrong? (after all, if I knew everything, I would be writing this blog from my Condo in Panama City!)

If we are really entering into a bear market and the price of stocks will continue falling, it is still the best time to leverage. Why is that? It is simply because you need to test your mental capacity of supporting potential losses. Leveraging strategies were doing pretty good for the past 5 years as the market was always going up. The tough part about leverage is when things turn sour.

If you borrow a small amount to invest right now, you will have a great chance to practice your mental toughness against the market. Most people lose money on the street as they buy and sell at the wrong time. They buy high and sell low.

Then, if you borrow to invest now, two things could happen. The first one will produce immediate profit as markets were going into a small correction. The second possibility is a bear market. You will then have the opportunity to practice your tolerance against losing stocks.

The key here is to invest an amount that will not kill your monthly cash flow so you can keep up with the investment loan payments and that you do not expect to need this money anytime soon. Then, you can leave your investments in the market and wait until you make good profit. A small amount such as 10K-25K should be considered a good starting point. Another possibility is to start a Smith Manoeuvre. Please make sure to validate your strategy with a professional before you go ahead with.

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Related Post

I often seefinancial strategies as recipes. The main reason being you need the right ingredients, the right utensils and a good cook to make a feast. The problem is that most people have some knives and spoons here and there, get a few things at the grocery store because they have been told to and have no clue how to cook their meal at perfection. Enough with the analogy and let’s get going with some calculation!

The following assumptions will be used to show the effect of a double dip over 10 years. You
marginal tax bracket is 40%, interest rate on investment loan is 6,5% (so my
post can be accurate next year as well!), amount of the loan is 100K, expected
return on investment is 7,2%. The chart below shows the result of the double
dipping technique.

As you can
see, I’ve had a lot of fun calculation the tax return, RRSP contribution, RRSP
growth and total cost of this strategy. It is true that too often we think about
the benefit of leveraging strategies but we tend to forget that they
include fees. In this example, total fees (including full interest cost as we
are reinvesting the tax return plus the tax on the invested amount) are equal to
$190,339 over 20 years. I used a marginal tax rate of 20% for the investment as
it combines capital gains, dividends and interest rate. In order to simplify the
calculations, I took for granted that we are paying tax on capital gains at the
end of each year even if they can be differed until the asset is sold.

After 20
years, you will end up with a net after tax profit of $278,236. That includes
your total investment plus your RRSP contribution minus all interests paid and
the tax on your investments. Keep in mind that you will also have to calculate
taxes upon withdrawals of your RRSP. So for as little as $793 a months, you can
build an half of million dollar portfolio (in today’s dollar). Inflation was not
taken in consideration as you will have 567K in your portfolio and your payment
will remain what it is as well. 567K is equal to 315K with an inflation rate of
3% a year.

I also
discover something funny while playing with my Excel spreadsheet. The benefit of
contribution to your RRSP (tax return + growth of your investment) is bigger
than the cost of interest. This means that if interest goes up, you will end up
with a bigger net after tax profit. However, the success of this strategy is
directly related to the yield earned on your investments. I think I was
conservative with my assumptions. Any comments, suggestions or questions are
welcome!

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Related Post