January 7, 2009, 6:00 am

December 31st Smith Manoeuvre Update

by: The Financial Blogger    Category: Smith Manoeuvre
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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!

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Comments

Hi there, I thought I would share this with you as I have been researching all over the internet on the SM as I prepare to sell my wife on the idea.

You talked about diversification, so here is from a guy named Pitz on some of the forums I have been reading whom seems to really know his stuff.

This is what one of his family members does for the SM:

55% S&P/TSX60 Index
20% S&P500 Index
12.5% MSCI Pacific Index
12.5% MSCI Europe Index
5% MSCI Emerging Markets Index

The reasoning is, because she is a Canadian, she should logically have an overweight on Canadian stocks (esp. to take advantage of the dividend tax credit), and the rest of the foreign content is roughly in balance with worldwide asset allocations by market capitalization.

The portfolio is funded by:

55% of the borrowing is in Canadian dollars
25% in US dollars
6% in UK pounds
6% in Euros
6% in Yen
2% in Hong Kong Dollars

So basically, its an almost fully hedged globally diversified portfolio with an overweight on her home country, Canada.

by: The Financial Blogger | February 28th, 2009 (7:59 pm)

Swilt,

This sounds like a great diversification. I have a question thought, if you do the basic Smith Manoeuvre (i.e. invest on a monthly basis instead of paying down your mortgage), how can you manage buying all those ETF’s on a monthly basis?

I suggest you look for index funds (see my latest post about my Smith Manoeuvre, I changed my investment strategy).

Cheers,

TFB.

Thats a good question, like I said I am just gathering info right now, that likely would have come up should I be successful in trying to execute (after selling my wife). I should find the comment and link it here to get you two talking.

My issue with all the talk of the risks around the SM is that as I fill my RRSP, TFSA, RESP etc…..where does the money go, to the market. So if I have extra money lying around (or decide SM is a better place for it rather than TFSA, RESP etc.) and it goes into the market after paying down my mortgage and being borrowed then where is the risk increased.

I understand Interest rate fluctuation can bear some but then you come up with an exit strategy, law change by CRA (which from what I read is minimal due to the fact all of our business system is based on this so it would tear the fabric apart) or a drop in housing market…which if you are buying and holding should not be an issues either.

I will look for that post in the thousands of articles I have read, and get it here for you.

Cheers

by: The Financial Blogger | March 1st, 2009 (9:09 am)

Swilt, I would say that the biggest risk is an emotional risk.

How would you feel after you have put 25K in your SM instead of paying down your mortgage and the investment only worth 15K?

This situation will happen (I was -27% for 2008 with my SM). However, over the long run, the market should give you 8 to 9% and your interest rate will be between 3 to 6%…. the spread is quite interesting ;-)

my best advice is that if you go with the Smith Manoeuvre, it is for AT LEAST 10 years (preferably 15 or 20).

Cheers,

TFB.

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