April 29, 2010, 4:34 am

Perfect Time To Leverage

by: The Financial Blogger    Category: Leveraging Strategies,Smith Manoeuvre
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Here we go again! As I am packing my stuff to move in mid-June, I am also preparing my next leveraging plan. Last year, I had to stop my smith manoeuvre strategy not because I was scared by the markets but because I felt that my financial situation was too shaky (my wife had just quit her job) to leverage everything that I could (especially since I was borrowing money to invest in my online company).

I am pretty convinced that the “easy money” has been made in 2009. However, there are several great investment opportunities in the upcoming years. Remember back in 2008, the TSX was at 15,000 points before it melted faster than a GI Joe in the microwave. We are now around 12,000 points and there is still a lot of room to reach our previous peak.

In addition to that, the Canadian economy is strong, the most productive country on earth (USA) will benefit from a weak dollar to boost its internal production and the emerging markets are as thirsty as vampires for resources to support their growth.

What about Canadian interest rate forecasts?

Sure variable rates will start going up. We hear 50 to 100 basis points this year. This is also why our Canadian Loonie is so strong. However, it’s not 1% that will make a big difference when you can find amazing companies (such as Canadian banks, Telus, BCE and oil companies) yielding dividends over 4%.

What about the loan from my parents?

Funny enough, I am not really concerned about the investment market or the interest rate forecasts. I am most concerned about reimbursing my parents! As of today, I still owe them about $21,0000 payable in full in a few months (November 2010). The good news is that with the sale of my house, I’ll be able to give them a good lump sum payment in June and probably end it up this summer (as I am expecting a nice tax return and a part of my job bonus in June as well).

Changing my investment strategy

I’ve been thinking about leveraging for a few months already. I didn’t want to move my stuff around too much as I really wanted to pay back my parents and sell my house first. Now that I know more numbers in my situation, I’ll be able to start thinking about my leveraging strategy.

I am not quite sure which route I will take first. I’m very tempted to build my own stock portfolio but I don’t have enough money to start this. My investment strategy will remain to invest about $400 to $500 in the market on a monthly basis. Therefore, buying ETFs or stock is impossible.

I think I will go with a mix of Altamira index mutual funds (Cdn and US) with an emerging market fund to complete my investment strategy. I might take a dividend fund in order to have distribution to pay off my interest… I am still wondering about this part.

One thing is for sure is that I will give more weight to the Canadian market at first. We have one of the strongest banking system and there is not much chance of having a surprise blow up in our face (I don’t believe there is a housing bubble in Canada).

So my first thought would be to invest (on a monthly basis):

$200 in the Altamira Canadian Index Fund

$100 in the Altamira US Index Fund (currency neutral)

$100 in the National Bank Omega Emerging Market Fund

$100 in the National Bank Omega Dividend fund (100% dividend stocks)

It might change as I won’t implement my investing strategy until July or August. I really want to make sure that I have enough money to pay for everything first, then, I’ll start having some fun investing again ;-)

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Comments

You might consider taking a loan and using your monthly payments to pay back the loan. With your dollar-cost averaging amounts you will invest $6000 in the stock market in 12 months, but half of the investment will be made with only half the year left, and the last $500 with only one month left.

Since interest expenses are deductible, the loan will cost practically zero and you will have brought forward your entire investment to today, giving you the full appreciation.

I am not currently leveraged, and I’m not sure I would go for the smith maneouvre because although it does offer the prospect of higher long-term gains, it also exposes you to more variance ;)

However, it is hard to go to battle when you don’t have troops, and waiting for money to be earned can take a long time, especially after you’ve lost some troops due to desertion, attrition (taxes, expenses)! So, I’m thinking after I build up some equity in the home I might go for something like a smith maneouvre, but leveraging 50% of the equity instead of all of it…

BTW, you don’t believe there is a housing bubble (I don’t believe there is a *bubble* per se, either), but your salary is probably significantly higher than most. What do you say about the average Joe family making 50k or 60k a year and they buy a 350k house? They might be able to afford it now, but at rates 3% higher? They might not foreclose but it sure won’t be easy.

What do you think about this report? http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2010/04/words-of-warning.html

This is a pretty good point. However, since my income is mostly variable (bonus + company income), the bank is not too hot about lending me additional money ;-)… even for a bank employee!

What do you mean you can’t purchase ETF’s monthly? What about Claymore ETFs? Every Claymore ETF on the TSX can be purchased monthly with zero costs after 1st purchase.

See: http://www.claymoreinvestments.ca/etf/investment-services/

Unless you enjoy losing 2+% off the top from the MER expenses on the Omega Emerging Fund (for example)

Starting in July or August might end up being perfect in hindsight especially if one of the PIIGS goes through a default by then!

I am considering leveraging also but of a different kind, basically taking out an RRSP loan an managing it myself. The tax returns will pay about 40% and the dividends will pay off the rest in time providing no disasters strike.

by: The Financial Blogger | April 29th, 2010 (12:15 pm)

@ Kevin,
This is why I am doing the Smith Manoeuvre, you can invest gradually. It is a good solution for small budget investing!

Housing bubble? it definitely depends where. I am not convinced we have one in Canada per se. Economic reports show that the Canadians could still manage to keep their house even with a raise of 2% of interest rates.

@Adam,
I’m talking about transaction fee in your brokerage account… I didn’t know that some brokerage acount offers this feature… this will be a great idea for a new post ;-) thx for the info!!

@Mich,
I hope I strat in a market dip but worst comes to worst I’m doing it for the long term anyway.

RRSP loan is interesting in term of the fiscal advantage (tax return) but don’t keep your loan for too long since the interest is not tax deductible..

thx for your comment guys!

Mike.

[...] The perfect time to leverage @ The Financial [...]

by: Tired Khan | July 9th, 2010 (4:59 am)

I’m just about to get into leveraging.
I think I’m in a very different situation from a lot of people on here.
Even though I’m pretty old – about 60 – I’m really naive when it comes to investing, having concentrated on my work up till now.

I am about to borrow 300K to invest in exchange traded funds.
I am very confident that I have enough money in superannuation to easily pay interest costs, even if interest rates go high.

I have no idea how long I will live. But who knows, maybe to 100. If I do, and if I look at my investment when I’m 80, will I be pleased that I made this investment 20 years ago?

It just seems to me that whatever shorter term crashes in share prices, over a 20 year period isn’t it extremely likely that the sharemarket will be much higher, dividends will thus be higher, and with inflation, the original borrowed amount won’t sound like much.

Isn’t it like borrowing to buy a house – usually if people think back, they are glad that they borrowed to buy the house. Usually most of their wealth is in the house.

But so many people are dead against borrowing to buy shares.

If I was able to treat my ETF investment as a house, and can afford any interest payment increases, what risk am I really taking?

by: The Financial Blogger | July 9th, 2010 (10:51 am)

Hello Tired,

The real question you need to ask yourself is how you will react when you will see you 300K debt and a 250K worth of investing. if you are feeling good about it, then you may consider doing leverage. However, I would also make sure to have additional sources of income to pay the interest rate (just to make sure you can keep you loan for a while if interest rate hikes).

300K seems a lot if you never invested in your life. I would start with a 50K portfolio for a year to see how it goes, then you can start invest progressively. Make sure to shop your financial advisor/broker to have good advice on building your portfolio!

Technically, ETF that pays dividends should be looking great in 20 years, this is what we see when looking at historic graphs ;-)

Cheers,

Mike.

by: Tired Khan | July 10th, 2010 (6:58 pm)

Financial Blogger:
The real question you need to ask yourself is how you will react when you will see you 300K debt and a 250K worth of investing.

TK:
I believe that I will cope well with that.
But not having been in that situation, perhaps I shouldn’t make any assumption about my reaction.
Perhaps I should try to find out about how often people react differently from how they expected they would when confronted with the downturn as we’ve just experienced. Ideas anyone?

Financial Blogger:
300K seems a lot if you never invested in your life.
Yes. But provided that it’s true that I can cope with the interest payments and hold out for 20 years, and invest in an index so that it takes away the risk of poor choice of individual shares – what exactly is the risk?

Financial Blogger:
Technically, ETF that pays dividends should be looking great in 20 years

TK
I was thinking of an ETF that just tracked the top 200 companies. The way I see it is that an ETF covering high dividend yield companies is only important for people who might otherwise have cash flow problems in the early years of investment. Comments anyone?

Many thanks

by: The Financial Blogger | July 11th, 2010 (6:40 pm)

@TK,
I’m 100% with when you say that there are no risk investing in ETF for the next 20 years. The risk is that if you start to panic and you want to sell it all ;-)

But if you can look at your investment portfolio only twice a year (to do your rebalancing),you should be good to go.

I’m still a bit reluctant about the huge amount you are about to borrow since you are at your first leveraging experience and that you are 60. But that is a personal choice!

FB,

One idea I have which is safer than the SM. Get 20% more money in retirement, and pay less taxes. See my free financial tools person A vs. person B. Let me know what you think and drop me a line.

cheers,

Brian

by: The Financial Blogger | August 16th, 2010 (8:05 pm)

@ Brian,

Missing one thing; I,d like to see the required capital per year requested to build this strategy at the age of 65?

I’m on a leveraged strategy but only with etf’s.

like the ishares but the vangurds etf’s will be purchased in the new year.

gl to all traders

chad

Hi FB,

I missed your comment?! I am not sure your question is the calculator is an example.

@Chad EFTs are great if income taxes did not come to play. How do you switch between funds without capital gains? What is the end game to lower the taxes? How do you pay less capital gains/taxes when you sell.

Brian