A long time ago on this blog, I wrote several posts about the Smith Manœuvre. This was a very popular concept a few years ago. More precisely, before 2008.
The Smith Manoeuvre was born in Western Canada when several households decided to convert their mortgage debt into a tax-deductible debt. After all, if Americans have the right to deduct their interest on their mortgage, why couldn’t we? The Smith Manoeuvre allows that over time. If you are not familiar with this strategy, I recommend you read my articles here and there.
The problem with the Smith Manoeuvre is that it implies leveraging. Instead of paying down your mortgage, you keep borrowing money from your line of credit to invest in the stock market. This makes this part of your mortgage tax deductible. But you still have a debt outstanding. As long as the market goes up, everybody is a king with this strategy. In 2008, most people were crying in their basements.
Now that the dust has settled, interest rates are still low and will remain low for a while and the stock market keeps rising, this looks like the perfect time for leveraging again. Back in 2009, I had to stop my leveraging strategy. Not because I was afraid of the market, but because my financial situation didn’t allow me to borrow anymore.
The key point with any leveraging strategy is to be able to support the stress.
#1 Stress from market volatility.
#2 Stress from the outstanding debts.
There were lots of changes in my life in 2009 and I couldn’t support having additional debt on my mind. We had our second child two years earlier and now my wife was about to stop working. The fact our budget had become thinner was the main motive why we decided to stop leveraging.
Right now, my situation is improving, I’m getting ahead of my debt payments and can feel the moment when I will have extra cash each month. I will possibly get rid of all my consumer debts (besides my car loan and mortgage) by January 2015. At that point, I will have more money to handle.
I’ll be left with two options: pay down my mortgage and car loan faster, or invest this money. Or… I could restart my Smith Manoeuvre!
I know leveraging is risky, but someone who has been borrowing to invest over the past 10 years is smiling today. Net of fees, a growth mutual fund (75% in stocks / 25% in bonds) did about 6.50% annualized rate. The investor probably paid an average of 3.5% in interest rate over that period. This leaves 3% net of fees and interest annualized for the past 10 years without disbursing a single penny.
If an investor had borrowed 100K 10 years ago, they would show a net profit of $52K after ten years (before taxes). So 52K is being made while enduring the most important stock market crash right in the middle of your strategy. 52K is being made without you putting a single penny on the table, not even to pay for the interest. 52K is being made and you can keep on going as the compound interest will make the next 10 years even more interesting. Because in 20 years, the same 100K borrowed will be worth $352K. Net of interest, and after paying the 100K loan, there will be 182K left in your pocket (minus taxes). So now we are talking about 182K in profit when you didn’t use one dollar from your pocket to invest.
As I just mentioned a few paragraphs before, leveraging is not made for the faint of heart. If you can’t keep up with a portfolio down by 20% and an outstanding debt of 100K, you are not made to leverage. But for those who can afford it, this strategy makes a lot of sense these days. I’m pretty sure some were able to make the 52K from 100K in just the past 4 years…
What do you think? Are you in for leveraging again?Comments: 0 Read More
Here we go again! As I am packing my stuff to move in mid-June, I am also preparing my next leveraging plan. Last year, I had to stop my smith manoeuvre strategy not because I was scared by the markets but because I felt that my financial situation was too shaky (my wife had just quit her job) to leverage everything that I could (especially since I was borrowing money to invest in my online company).
I am pretty convinced that the “easy money” has been made in 2009. However, there are several great investment opportunities in the upcoming years. Remember back in 2008, the TSX was at 15,000 points before it melted faster than a GI Joe in the microwave. We are now around 12,000 points and there is still a lot of room to reach our previous peak.
In addition to that, the Canadian economy is strong, the most productive country on earth (USA) will benefit from a weak dollar to boost its internal production and the emerging markets are as thirsty as vampires for resources to support their growth.
Sure variable rates will start going up. We hear 50 to 100 basis points this year. This is also why our Canadian Loonie is so strong. However, it’s not 1% that will make a big difference when you can find amazing companies (such as Canadian banks, Telus, BCE and oil companies) yielding dividends over 4%.
Funny enough, I am not really concerned about the investment market or the interest rate forecasts. I am most concerned about reimbursing my parents! As of today, I still owe them about $21,0000 payable in full in a few months (November 2010). The good news is that with the sale of my house, I’ll be able to give them a good lump sum payment in June and probably end it up this summer (as I am expecting a nice tax return and a part of my job bonus in June as well).
I’ve been thinking about leveraging for a few months already. I didn’t want to move my stuff around too much as I really wanted to pay back my parents and sell my house first. Now that I know more numbers in my situation, I’ll be able to start thinking about my leveraging strategy.
I am not quite sure which route I will take first. I’m very tempted to build my own stock portfolio but I don’t have enough money to start this. My investment strategy will remain to invest about $400 to $500 in the market on a monthly basis. Therefore, buying ETFs or stock is impossible.
I think I will go with a mix of Altamira index mutual funds (Cdn and US) with an emerging market fund to complete my investment strategy. I might take a dividend fund in order to have distribution to pay off my interest… I am still wondering about this part.
One thing is for sure is that I will give more weight to the Canadian market at first. We have one of the strongest banking system and there is not much chance of having a surprise blow up in our face (I don’t believe there is a housing bubble in Canada).
So my first thought would be to invest (on a monthly basis):
$200 in the Altamira Canadian Index Fund
$100 in the Altamira US Index Fund (currency neutral)
$100 in the National Bank Omega Emerging Market Fund
$100 in the National Bank Omega Dividend fund (100% dividend stocks)
It might change as I won’t implement my investing strategy until July or August. I really want to make sure that I have enough money to pay for everything first, then, I’ll start having some fun investing again 😉Comments: 16 Read More
Back in February, I have made a few changes in order to get a better diversification in my Smith Manoeuvre investment strategy. Therefore, I decided to add US, Canadian and International index funds. Unfortunately, I noticed in March that all my transactions have not been done according to my instruction (it is apparently quite a feat to write down 4 transactions!).
Nonetheless, I have made some great picks since my new investments really picked up during the March Rally. It is good to see that my Smith Manoeuvre account is showing a positive year to date return or 4.2%. Overall (since February 2007), my Smith Manoeuvre account shows a negative return of -25%. It is obviously quite tough to compensate for 2008 in a single quarter! It will actually going to take years to come back to a decent level.
So here’s what my portfolio look like as of March 31st:
– National Bank Divided Funds: $4,942
– Sprott Canadian Equity: $3,163
– Omega preffered shares: $101
– Omega American consensus: $183
– Altamira Canadian index: $0
– Altamira American index : $177
Total in my Smith Manœuvre : $8,566
I am still not convinced from the March rally that the stock market is back on track and that everything will come back to normal in 2009. While I believe we will see our money back (for those who are still invested in the market!) and that it is currently an opportunity of a lifetime, what happened in March just seems unreal. On the other side, what happened back in September and October 2008 seemed unreal as well! This is why I stick to my investing strategy no matter what I think and I am not trying to sell to make a quick profit and come back into the market after the next correction. I still think that you should not do market timing.
I am now investing $500 per month into my leverage strategy and I don’t plan to make much modification for a while. I will look at what is going on on the markets and look at my investment strategy next quarter but don’t expect many changes. I think I will keep this investment strategy for the upcoming year and keep dollar cost averaging the market!Comments: 5 Read More
I have not been writing much about The Smith Manoeuvre Strategy for the past months because I was simply too lazy to make some modifications to my investment portfolio. I was aware that I had to do some tweaking for my investments strategy.
I am heavily concentrated in financials (National Bank dividend fund) and in oil and other natural resources (Sprott Canadian Equity Fund). But the most important part: I am 100% in the Canadian market.
Now that the market is down and that everybody is selling the stocks cheap, it is the perfect timing to buy more shares of good mutual funds. I would rather go by trading indexes but since I am injecting money on a monthly basis into my portfolio (and it doesn’t show much these days 😉 ), I have no other choice but to pick funds instead of indexes.
So I cancelled my $400 periodic investment into the National Bank dividend fund and decided to split this amount among 4 funds. On top of that, since I am paying a very low interest rate and that I have enough cash flow to afford it, I decided to increase my monthly investment to $500.
$100 in Altamira Canadian Index Fund
I wanted to keep of my monthly investment into Canadian equity as I think that the Canadian market will go up over the long run. There are several good undervalued companies that will pick up on the next economic boom. On top of that, the Altamira MER’s is only 0.53%. So I will be almost on the target to follow the index.
$150 in Altamira US index fund
Based on the same reasoning regarding the MER’s, Altamira indexes funds are pretty cheap and the US fund is hedged against currency risks. I wanted to start diversifying my risk with another country. As the American market took at good kick in the teeth in 2008, I think it’s a perfect timing to buy an American index fund.
$150 in Omega preferred shares
Canadian preferred shares are mostly issued by financials, insurance companies and resources companies. Since they took a major hit in 2008, we have great chances to see this type of class coming back with great strength. In addition to that, the Omega preferred shares (managed by ING) is the first Canadian fund of being 100% invested in preferred shares.
$100 in Omega American consensus
Why am I putting more money into the American market? Because I love the way the Omega American consensus picks its stocks. To learn more about the trading model developed by Validea capital, you can click here and read about my review of their Omega funds. Their trading method is based on mathematical models and, therefore, gets rid of all kind of emotions in the trading equation.
I decided to pick American consensus instead of international for 2 reasons. I truly believe in the American market capacity of coming back stronger than international equity. The second reason is based on the fact that many great American companies make a lot of their revenue outside the United States. Therefore, I am still expanding my diversification a little bit to the international market.
Disclaimer: I am buying those funds but this post should not be considered as any kind of recommendation of buying or selling any of the above. Please trade carefully ;-)…and at your own risk!
Comments: 10 Read More
Back in September, I announced that I would post on my Smith Manoeuvre strategy on a monthly basis anymore. Believe it or not, it was not related to what was happening on the market. The proof is that I am still posting my result and the market is still bad. I actually found it heavy to comment month after month a strategy that will last for 10 years and more. So here is the final result after almost 2 years.
I have made monthly investment in the National Bank Dividend mutual funds and the Sprott Canadian Equity funds. Over the past 2 years, I have made a total investment of $10,100. This money was taken out of a separate HELOC to make sure that interest is tax deductible. Borrowing cost for 2008 has been $198.73. Therefore, I should receive a tax return of $83. Barely enough to buy 2 good bottles of wine 😉
I have encountered difficulties when asking for additional credit at my bank. The main reason was that they didn’t understand the strategy and therefore thought that I had been paying interest only on my mortgage without making any capital reimbursements. They didn’t want to understand the link between my brokerage account and the borrowed amount on my second HELOC account.
I was able to get what I wanted but it wasn’t without pain, a lot of documentation and explanation! Considering the current economy, I can’t blame them; all they were seeing is a young kid with a big line of credit maxed out for 2 years.
I was supposed to invest into international funds in order to diversify my risk and optimize my long term yield. While I am still wondering if I’m better with ETF’s or specialized funds, I decided to not budge. The Problem with ETF’s is that I can’t buy them on a monthly basis. I would have to wait until I have sufficient money to buy at least 100 shares. The thing is that I don’t want to put my SM monthly contribution into a money market fund. I should probably go with index funds in the meantime then.
I was a bit disappointed with the annualized return that my account shows after almost 2 years of investment. I actually have a negative annualized return of -27% since February 2007.
Hopefully 2009 will be a better year for all of us in regards to the stock market!
Comments: 5 Read More
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