This is where your finance takes place

The Results

I decided to start with the bad news right away. When we look at my first year’s return, the SM was definitely not a success. As of Jan 3^rd, I was -8.25%. I had borrowed $5,691.39 over the year and my funds value is at $5,221.60. This is definitely not impressing and a bit disappointing especially considering the fact that I decided to invest in the NBC Dividend funds for its strong yield history and low volatility profile. In fact, it was voted as one of the less volatile Canadian dividend fund on the market by Morningstar!Another thing that I have to keep in mind is the interest I paid over the year. I actually paid a total of $98.49. This should be counted in my lost and therefore, decrease my overall return to 9.98%. I would have been better off stocking barrel of gas in my basement for a year!At least, I will be getting 42% of this amount back as it is tax deductible… big deal!

The Lessons
The Smith Manoeuvre is definitely a great tool for learning how leveraging strategies work as it is a progressive investment plan. While I lost nearly 10% (plus interest paid on my line of credit), it doesn’t represent much in the end (about $500).I learned that putting all my money into one funds increase my risk and I was definitely penalized by the size of my portfolio for the first year. Starting in 2008, I will probably try to diversify my investments. My first move will be to buy the Sprott Canadian Equity fund probably next month.I will probably increase my SM payment this year as I was able to free up some cash flow by restructuring my debts through my property.In the end, I am quite satisfied with this first year using the Smith Manoeuvre as it has been a great learning experience and I think I will be able to come up

with better results for next year!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.

-I purchased a pre-construction condo in Edmonton last year, only paying 5%
until the condo is completed.
-The amount owing is $155,000.
-I have a 5 year fixed mortgage secured at 5.4% with TD.
-I will be putting 20% down when I finally get to activate the mortgage -
which is looking to be in 6 weeks or so. I will be pulling $15,000 from my
RRSP to use as down payment for First Time Home Buyer.
-The value of the property has increased to $280,000 since I bought it.
-I don’t have a financial advisor. I am hoping to retire in 30 years!!

Here is my answer :

- You should definitely get a financial advisor that is comfortable with the SM. He will be able to find the best product on the market to operate the SM according to your needs. However, since you don’t have one at the moment, here are my personal advices :

- It seems that you have a pretty good equity in your condo (Edmonton’s market is just incredible!). Therefore, you are allowed to get up to 80% of you property value. Counting that you will end-up with a 155K mortgage for five years (I would be expensive to transfer it to a more SM friendly product), you will have 69K left for a line of credit (280K * 80% - 155K). Technically, you are better of getting the HELOC with TD as they already have your first rank. Finding another institution that will accept to be 2nd might be expensive in term of interest rate. I would say that you can start you SM with a 2nd rank HELOC at TD. When you are signing your documents, make sure
they register the full amount of the property (280K) so you don’t have to pay for lawyer fees in the future.

- Another trick would be to ask them to finance a smaller part as a mortgage and increase your line of credit. For example, you might have a 112K fixed mortgage at 5,4% and a 112K HELOC at P+0 with a owing balance of 43K. This 43K could be slowly transfer into tax deductible debt through the SM.

- Make sure that TD offer multiple sub-accounts with their HELOC. If not, you need to find another institution that would go 2nd rank (and DO NOT register the full amount of your property value with TD in this case as you will be left with no room for a 2nd rank). I know that IG is offering a HELOC 2nd rank behind the registered amount with another institution. If you can find an IG consultant that is familiar with the SM, you will kill two birds with one stone

- If you can pull out the full 20K in RRSP under the HBP, I would do it. You can simply apply the extra 5K (considering that you planned on putting 15K from your RRSP as cashdown) in the SM and start with this amount invested on the very first day.

- The key point is to look at your budget and assess how much you have available for the SM. Do not use the maximum amount possible, we always run into unexpected situations where we need money. Use your extra cash flow to pay down your HELOC or make extra payment on your mortgage. You can always use the room available from your HELOC as an emergency fund (you will find a post about this topic on my blog).

I hope that those advices help her out with her great project of implementing a Smith Manoeuvre. Any other ideas?

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Another quick month passed by and I just sent another $400 in my smith manoeuvre investment account. So far, I invested $4,9,44 and my investments are at $4,857. This means that I am still showing a negative return of 1.76%. It seems to be pretty stable from months to months but I would definitely like to see some green figures in my Excel spread sheet!

Interest keeps pilling up for a total of $60 for the year so far. This is one thing I really like about the Smith Manoeuvre; you start leveraging with a tiny amount of money. Therefore, you have the chance to learn from your mistakes and gradually become comfortable with the amount of the debt. I must admit that I prefer to see my little $4,800 owing in my Smith Manoeuvre line of credit than looking at my 185K negative balance on my mortgage!

A mortgage debt looks scary to me for two reasons: the first one is because it is a huge amount. It is not like I could write off this debt in a heartbeat. I must remind myself that I will take twenty five years or so to pay it off. Or in my personal case, take about twenty years to offset it with enough investments in my Smith Manoeuvre account. The second thing that bugs me is the fact that this debt is not related to an asset that grows over time. It is true that the recent bullish market for properties could make you think that properties are as good as stocks but it is not the case. In fact, over a long period of time, property values increase at the same rate than inflation. Therefore, you should not count on your house’s appreciation on the market to make a decent profit.

Speaking of property values, I just sent all my stuff to my banker so I can increase my HELOC. The goal behind this operation is very simple. I already have a car loan and some other debts I would like to put into one single payment. I know I will amortize the payment over a longer period of time, but I care more about cash flow than the total interest paid over time. If the operation is a success (sounds like a medical operation isn’t?), I should be able to reduce my monthly expenses significantly and therefore get closer to my $1,500 project. I usually get a raise in June so I need to find other ways to reduce my expenses or increase my overall income since then! Anyway, I highly doubt that my raise would cover $1,500 a month!

If my property is appraised high enough, I might send a couple of hundred bucks into the Smith Manoeuvre again in order to be able to enter into the Sprott Canadian Equity fund. I recently checked and the fund was still opened. Sprott is fairly aggressive in his funds but also shows a good reputation in term of return on investments. Once I bought my first 5K shares, I will continue with the National Bank Dividend fund with my monthly investments.

As many readers did it in the past, if you have any questions regarding the Smith Manoeuvre, please feel free to email me at thefinancialblogger(at)gmail(dot)com.

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