February 26, 2009, 6:00 am

For a Better Diversification in my Smith Manoeuvre Strategy

by: The Financial Blogger    Category: Smith Manoeuvre
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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!


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Comments

Hi,

I was comparing Omega Consensus American Equity Fund and RBC O’Shaughnessy U.S. Value Fund (I like that one). Since inception the RBC fund perform well in the long term and is pretty cheap (since 2008 was catastrophic).

What should we mostly consider in comparing funds? MER over mgnt fee? 5 year return? If inception period is short?

Thank you.

I personally would not buy a fund that doesnt have at least 5 yr track record and even then i’d be very careful. I would look at the managers track record at other funds MER and mgnt fee tell me different things i like comparing MER it tells me a little more than the mgnt fee, such as turnover rate, I dnt like managers who have a high turnover ratio.

by: The Financial Blogger | February 26th, 2009 (8:55 pm)

Cathie,
You are right as the RBC MER’s are cheeper (1.47% compared to 1.70%). I don’t know much about this fund actually (we all know O’shaughnessy, but I don’t know much about this specific fund).

However, I really like the idea that stocks are being bought only based on quantitative information and not through emotion filter of a trader.

Ray;
Giving importance to the past record is looking behind your back. Who cares if the fund made 10% for 5 years, which kind of guarantee you get that it will make 10% in the next 5 years? Ask people who selected IG dividend fund for its “almost” perfect record? they did -22%. Hence, this fund was making 8% annualized return since inception (1965).

Over time, there is a lot of things that can change:
- fund managers
- technology
- economic cycle
- etc.

I do look at past returns, but I am not afraid to try new funds ’cause the past does not represent the future ;-)

Don’t you think that over time, it will be expensive to get these mutual funds compared to buying ETF’s every 3-4 months?

Definitely past performance is not guarantee for future performance, I dnt just base it on the past performance, but it’s an important factor.
I look for long term consistency, how it performed during down markets, turnover ratio’s etc. long term track record is just one factor, just like you would with any investment. the IG fund was down -22% compared to TSX being down over 30%.

i guess you right, i should pay some attention to new funds ;)

Thank you all for your advices.

Hello, first of all, I truly enjoy reading your blog, has given me a few things to think about, so thank you.

Question regarding the Smith Maneuver. We have recently switched our conventional mortgage into one that allows us to perform the SM. The financial planner showed us the SM Calculator, and honestly the numbers looked very promising and attractive, but that’s assuming the return on investment would be 8% annually and the rate on our HELOC was at 3-4% (I forget exactly which number he plugged in).

Reading thru your updates, I have yet to see you make money from the investments, and the interest you pay on the HELOC is obviously going up with every month. The tax deduction, for the first number of years almost seems laughable to make a difference (not to say that a small deduction is not better than no deduction).

Honestly, I am having second thoughts on continuing on with this type of investment vehicle. We currently have some mutual funds and very small stock portfolio. Any words of wisdom in the form of a second opinion would be appreciated. Thanks!

by: The Financial Blogger | March 22nd, 2009 (7:49 am)

Krystian,
I started my Smith Manoeuvre in February 2007. Since then, I’m losing money ;-) Does this mean I have to stop? nope, it just means that I started investing when the market was at its peak.

I hope that the financial planner showed you as well what could happen during a bear market. It is very important to be aware of all possible situation.

The SM is a long term investment strategy. If you just started the strategy and you don’t feel comfortable losing money, maybe it wasn’t for you in the first place.

On the other side, for those who have the courage to invest in the market, I believe this could be the opportunity in a lifetime. BUT you must be able to get through high fluctuation and the perspective of “temporarily” losing money.

Hope this helps!

TFB

TFB,

The financial planner didn’t cover the bear market at “great lengths”. I’m sure it wasn’t in his best interest to scare a client. Having said that, I do understand the fluctuations of the market.

Thank you for your opinion. Having discussed the issue with the boss, we decided that we will hang in there for a longer haul.

Another question, since the interest on the HELOC is prime, what is the likelyhood that through inflation, in say 8 years time, prime will be really high (let’s say around 9% – hypothetically speaking) and the pressure will be much higher on the stocks to have a strong return in order for people in the SM not to lose money?

Since I am just trying to get into the economics, trying to gain a better understanding of concepts within economics, can you recommend a book that I can read? I have no prior education in this field, however do find it enticing.

Thanks.

Krystian,

It was in the Financial Planner’s best interest to cover the bear market possibility; you would have less questions about it now and the facing a bear market during a long term perspective is 100% guaranteed ;-)

While I don’t believe prime rate could reach 9%, the last time we reach a “peak” was in 2007. Prime rate went from about 3.75% to 6.50%. If you remember, the stock market was booming from 2004 to 2007 (the period while prime rate increased). On the other side, you must not look at the SM one year at a time but in a global perspective (i.e. it is possible that you face a short period where the interest rate is higher than your investment returns, however, remember that interest rates increase to slow down the economic growth in order to stabilize inflation. Since economic growth = bull market, you should be making money ;-) ).