This is where your finance takes place

Well well well… I did I survive my month of August? Did my investments took a drop and followed the market? After all, most banks were on a free-fall during the last month and I only held the NBC dividend fund in my portfolio. Everybody knows that banks are big players in the dividend funds. In the top ten shares of the NBC dividend bank, five of them are related to banks.

 

Surprisingly, I am not doing too badly. So far… my account shows a small negative yield of 0.79% as of this morning. I was definitely expecting a much lower yield considering the market. I guess that the last 2 weeks help to bring back my investment a little bit higher. It is basically like I am not losing anything on my investment. Hence, I am losing money considering the interest charged on my line of credit.

 

My line of credit shows a negative balance of -$4,100. I am still surprise to see how much I put so far and it was not even for a year! Even if the money invested is for long term, it constitutes a great source of liquidity if I ever run into financial troubles.

 

I was thinking about it for the past three month and I realized that I can’t keep up with investing $600 a month (on top of paying my monthly interest). The fact that my wife is on maternity leaves hurts our cash flow big time and I am starting to feel it.

 

However, the real reason why I will drop my monthly investment is that I just got back from the garage and it costs $1,900! I recently put about $1,300 six month ago. Even if my car is paid off earlier this year, I will still have the equivalent of a car payment this year. I used to pay $330 per month, and now I am averaging $267 per month for maintenance. I will therefore drop my monthly investment into my Smith Manoeuvre from $600 a month to $400. I will still be able to put almost 5K every year in investment which is pretty good. Probably that next year, I’ll be able to increase it back to $600 and keep going the right way.

If you liked this article, you might want to sign in 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.

It is just incredible to see time passing by like that. Another month, another contribution to my Smith Manoeuvre plan! While we are still waiting for our little baby girl to come, I am taking this moment to see where I am at in term of investments.

A lot of things happened in July as the Bank of Canada increase its rate. Therefore, prime rate is now 6.25% as of July 11^th. More changes happened into markets as the last two weeks of July were not as bright and sunny on the newspapers than outside my house!

Was it only big institutions taking profit out of the market, a small correction or the beginning of a bear market? Only time will give us the answer to this question. One thing is for sure however, you can feel the tension for the analysts more than ever. Since the beginning of this year (especially after the “Shanghai Flu”, markets are more nervous about fluctuations. I guess it gets to our head and sticks there: after 4-5 years of bull market, things have to drop. They can not just keep going. The more we think about it, the more chances we have that it will happen!

Anyway, enough with psycho-finance and let’s take a look at what is happening in my Smith Manoeuvre. Another $600 was added to my investment portfolio on August 1^st. Therefore, I am at $-3,500 in my line of credit. My investments (plus reinvested divided) are at $3,477.91. I must admit that it went down my much more in the middle of the month, but that is only part of normal market fluctuation. Interest paid so far is $19,99. Therefore, I will receive about $8 in tax return so far. It is not really impressive, but at the end of the year, it will pay for McD’s!

I am getting closer to get to the 5K minimum to buy the Sprott Canadian Equity funds. I will have to check if the fund is still open for new investments (it was closed until last year). Since I am not there yet, I’ll keep the mystery for later! It will be interesting to see what the Sprott team will do in such fluctuating markets.

On another note, please check out the new edition of the carnival of personal finance at Frugal Law Student(Best Week Ever Edition). Since he is studying in Law school, I guess he will not have to be frugal for long! My latest article on Frugal VS Non-Frugal is also part of the festival of frugality at Frugalforlife.

Stay tuned for the next update of the Smith Manoeuvre at the beginning of September!

*******************************************************************************

The bad credit loan can be taken from the money lenders without reviewing the bad credit history of the borrowers. If you are worried about the unfair or unnecessary bank charges, you should consult the expert financial ombudsman for legal assistance. There are a number of categories of capital one card with varied loan packages. The cheap loans offer competitively very low cost charges of the financial institute. The consolidation loans help you to avoid the bankruptcy or state of crisis due to the heavy charges of loan. The payday loan is issued for the debtors to cover the expenditures immediately. The brokerage company provides the services of financial transactions between the debtors and money lenders on the commission basis.

In this series, I outlined several points considering the Smith Manoeuvre strategy. I think that even many people think that there is a huge risk to leverage against your property; The Smith Manoeuvre does not implicate much risk. Any type of risk is related to your own concept and perception of what is risky. There is nothing real about a risk as it relates to a possibility of something happens in time. Risks are not real. Therefore, if you change your perception, if you play around with your mind and your childhood concepts, you will fin out those risks related to the Smith Manoeuvre are not that bad.

In today’s post, I suggest we change our perception of our own property for a few minutes. Imagine that you never bought this house and that you are just paying a rent. View your property for what it is; a source of expenses. You make your monthly payment and pay for maintenance costs and taxes. Forget about the idea of paying off your mortgage, this is not happening as you are renting your property. Your rent is related to the interest paid on your mortgage. No capital, interest only payment. Remember, you are simply renting this property.

Your rent (minimum requested payment) will be minimal compared to a regular payment. Therefore, if you loose your job or if your income decreases for any other reasons, you should be able to keep up with you rent payment. You will also notice that interest only payment on your property will likely be the equivalent of renting a 5 ½ condo in your area. Some will say you can’t compare an apartment to a house as you don’t benefit from a yard, basement and extra storage. I personally changed my perception to look at the worst case scenario. If I ever loose my job and I could not keep up with my mortgage payments, I might have to downsize from a house to a smaller apartment. In any cases, I rather keep my house and pay the same thing as I would pay for a smaller apartment! Keep in mind that taxes and maintenance cost must be added to your interest payment in order to keep the same scale of comparison.

In the United States, banks already have changed their minds as 100% or 125% financing and interest only payments are part of financing options to purchase a property. You might say that there is a sub-prime lender crisis. However, several banks are doing just fine with this kind of high risk financing. They calculate that overtime, the clients will have a property that will grow in value and they will be able to reimburse their mortgage whenever they sell the property. Several people are “renting” their property by paying interest only on their mortgage. Therefore, they free up some cash flow to do something else.

Unfortunately, this cash flow is rarely used for the good reason; to create assets. The Smith Manoeuvre is part of the “pay yourself first” technique. By setting up automatic withdrawal from your HELOC and investing this money directly in your investment account, you will avoid wasting the extra cash flow on some other goodies.

In the end, by changing your perception of risk and of your mortgage, this is where you are going to end up: RICH! On a more serious note, you will pay your “rent” while your investment is growing up. You will also build equity within your property as your house will gain in value over time. After 15-20 years yours house should have more than doubled in value and your investment should worth much more than your mortgage. Try to keep your parents’ voice away and shut down that “pay your mortgage first as it is your biggest debt” mentality for a minute. You might find out another world of financial possibilities.

It’s been a while since I wrote my last article about the Smith Manoeuvre strategy (I am not counting my July update). In fact, it’s been only a month but I feel that there is so much to say about it that we can’t keep hiding this strategy to most people. I’ve seen my rank in the search engine improve related to Smith Manoeuvre Strategy searches so I conclude that there is a definite need to go further.

 

I fully understand that it is not natural to think that you will use your house to invest in the stock market. For many years we have been told to go to school, work hard, contribute to your RRSP and pay off your mortgage. While those comments are good advice, they will never make you rich. However, financial planning and discipline could bring your financial position to another level. Several questions remain around many financial techniques. I’ll try to answer some of them post by post

 

What if market crashes and I’m left with nothing?

First things first, thinking that the market will crash and your portfolio will get to 20% of your book value is irrational. Markets can crash and market will crash. However, a heavily severe correction will make your portfolio drop by 30%, maybe 40%. Nonetheless, you have to count that markets are not on a constant slop. Therefore, you have a big chance to have increased your portfolio value before market crashes.

 

I’ve seen many portfolios of people that borrowed to invest back in 2002, 2003 and 2004. As it was the good timing to invest you might say, they have 130% to 200% of their loan value in their investment account. Keep in mind that most of them are paying interest only.

 

Starting from that point, let’s say that you have borrowed 100K and your investment worth 150K today. Tomorrow morning you find out that market is crashing by 30% (which is unlikely to happen in one day but you never know!). You investment will drop to 105K. You will still have a positive return (even though it will not make you rich) after an unpredictable drop.

 

What if you invest now and the markets crash in 6 months?

 

This is a more rational fear than our previous example. As we are in a bull market for the past 4-5 years, there is a big chance that economy will overheat and that we will face a bear market. If it’s the case, you better be ready to ride the rollercoaster in your first years because it won’t be easy on your mental health.

 

You might find yourself investing months after months into stocks or mutual funds that will keep going down as you buying more and more of them. However, it may turns into a major advantage over the long run. In fact, the Smith Manoeuvre Strategy implicates regular (preferably monthly) purchases. You could then average your cost down in the bear market.

 

If you pick your investment in a buy and hold mentality, you will create a great opportunity to buy good companies at a discount price. As this financial technique is based on a long term investment horizon, you might find yourself laughing when the next bull market will arise.

 

In conclusion, I must admit that this idea of writing post about the Smith Manoeuvre was made to write 1 or 2 post about the potential risk. But the more I write, the more I find stuff to write about. Therefore, I will continue this series for a few other posts. In the meantime, please send me comments or email your question about the Smith Manoeuvre. There is nothing better than communication to fully understand financial techniques.