The recent drastic drop of interest rate occurred by the Bank of Canada made me think twice about my Smith Manoeuvre Strategy . With payment of $1,400 a month, I could easily drop more than $400 in my Investment account. But on the other side, I have about 30 months left to pay off a 31K debt. So leveraging over a short period of time is very risky. In fact, it is more like gambling than investing!
In fact, my original repayment plan was the following: 2 years ago, I wanted to start a Smith Manoeuvre and reimburse the debt after 5 years with this money. While 5 years is a little bit short for a leverage strategy , I was willing to take the risk as my income is still increasing at a steady rate years after years.
Now 2 years had passed and I only started my strategy last year. In fact I did put in place the SM 2 years ago, but I had to cash in all my investment when I bought my second house. This is why I don’t have this much in my account.
So considering that I have now $7,100 in the account (still positive, yeah!) and that I invest $400 per month, I would get about 19k at the time of repayment. Hum… it seems that I am not going to payback in time, right?
Well this is because I decided to not put everything in the Smith Manoeuvre. Am I getting nervous about the market? No way! But I am getting nervous about the fact that I need 31K in 30 months and I don’t think it is too smart to invest that money in highly volatile funds like the Sprott Canadian Equity Fund.
Therefore, I decided to pay back a part of my mortgage at the same time. So there is another $450 per month used to pay down my mortgage. So in 30 months, I have about $13,5K in equity in my property. In the end, chances are that I will be able to refinance my mortgage, reimburse my debt and not touch my Smith Manoeuvre Investment.
So the strategy is steadily going on without much difference this month. I still shove another $400 into it and, thx to Mr. Sprott, the account is positive for a third month in a row :-D.
The idea of buying international funds is still on the table but since I didn’t have much time to think about it recently, I am not planning on making any move in the short term. I’ll probably reconsider this option later on this summer, once all my exams are done!