June 4, 2008, 6:00 am

My Smith Manoeuvre – May update

by: The Financial Blogger    Category: Smith Manoeuvre
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Another great month on the market as my investment are getting higher and higher. It seems that moving a part of my portfolio into Sprott Equity Canadian fund was a great idea 😉 Hopefully I will continue to have my lucky touch when I select a more international fund! In the meantime, Sprott went public a few weeks ago and a journalist from the Globe and Mail was thinking that Eric Sprott was making so much money out of its companies (in hundreds of million of dollrs) that the fund was better bet than the stock!


So my annualized return rate is now 14.5% while I did paid between 3.5% and 2.75% (a big thanks to the Bank of Canada on this one!) in interest charges. In dollars, I am making a paper profit of $753 minus $189 in interest, so it makes $564. So my net annualized return is therefore 10.8%. Not too bad after a little bit more than a year.

So here are my positions so far:

National Bank Div. fund: 129.639 par at $17.17 for a total of $2225.90.

Sprott Cdn Equity fund: 116.444 par at $50.03 for a total of $5825.69.

I am still making my $400 a month investment even though interest rate went down big time since 2007. There is a part of me wanting to increase my leveraged strategy by at least $200 a month and there is another part saying that I have other debts coming due in less than 3 years and I should leave my Smith Manoeuvre the way it is.

When you are borrowing to invest, it is important to stick with your investment plan. If you start playing with your periodic investments or borrowed money, you might go off track at one point. The temptation is always great when you are actually making money. Everybody wants a piece of the market, right?

I recently read an interesting point of view on the smith manoeuvre strategy written by Frugal Trader at milliondollarourney.com. He is also making his mortgage tax deductible through the SM strategy but he decided to pick his own stocks. The interesting part is that he is using high paying dividend stock in order to cover for his interest charges on the leverage loan (a home equity line of credit – HELOC).

With this strategy, he doesn’t have to take any money from its pocket. Therefore, he is applying leverage at its best: using other people money to make money!

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Comments

Hey FB! Thanks for the mention and congrats on your success thus far.

Couple of weeks ago I met up with a financial advisor from TDMP (tdmp.com) who implement the smith maneuver. However, during the conversation I learnt that there was a large setup cost in order to setup the smith maneuver which they quickly passed over by saying it was just bad debt and over time it would be converted to good debt.

To give you a quick summary of the cost:

1. Each month I would be paying $39 for the monthly cost of running th smith maneuver
2. The cost of moving from my mortgage broker to their preferred mortgage broker
3. The initial setup cost of approx 1500

The total setup cost added together with my mortgage equaled my total bad debt.

Couple of questions

1. How does this compare with your setup cost or did you have any initial setup cost in order to implement this strategy?
2. In order to setup this strategy to companies such as TDMP charge a setup fee
3. How does one go about finding a good financial advisor that implement this strategy?
any recommendations ?

Cheers
Raj

by: The Financial Blogger | June 5th, 2008 (8:22 pm)

Hello Raj,

I’ll answer to your questions in order:

1. I did my own setup since I am a financial planner. In general, if you change financial institution for your mortgage, you will have to pay for an appraisal fee (to determine the actual value of your property) and notary fees. That would correspond to cost #2 in your comment.

In regards to cost #1, it doesn’t cost me anything with the National Bank. Home Equity Line Of Credit fees are determined by the financial institution. However $39 a month seems unacceptable to me. For example, an Investors Group consultant would set it up for free. I set Smith Manoeuvre for free at my bank as a financial planner too!

In regards to cost #3, there should not be other initial setup cost than the legal and appraisal cost (which you can negotiate to have a part paid by your institution). I would ask TDMP what they do for $1500 plus $39 than another advisor doesn’t do!

2. As I said in my first answer, you can find financial advisor (preferably financial planner) that will set it up for free. Make sure that you find a reliable accountant that understands the strategy when it is time to fill out your tax report.

3. There use to have a list of “Smith Manoeuvre Professional” on http://www.smithman.net but I can’t find it anymore. I would strongly suggest that you go and see a few advisor before making your choice. It is hard to find a good advisor, but they exist 😉

Good luck with you SM and don’t hesitate to contact me for more question at
thefinancialblogger (at) gmail (dot) com