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April 29, 2010, 4:34 am

Perfect Time To Leverage

by: The Financial Blogger    Category: Leveraging Strategies,Smith Manoeuvre

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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February 11, 2009, 7:05 am

The Perfect Timing For Leveraging The Market

by: The Financial Blogger    Category: Leveraging Strategies

Oh man, Oh man Oh man. I will start this post with a big disclaimer note: I am not telling (influencing, forcing, giving you a hint on the market) you to do what is written in the following post. This is my humble opinion and my financial thoughts are as good as yours. So please don’t blame me if you do anything with your money 😉

However, I still believe that this is the perfect timing to leverage in order to benefit from the low stock market. Why?, here’s why:

Very low interest rates

This probably once in a lifetime as interest rate across the world is at its lowest. You can basically borrow money for free ;-). In Canada, if you have been fast enough when I was telling you to get the biggest line of credit possible while the rates were low, it is possible to borrow for 3%. This is what you can get from a Home Equity Line of Credit. While HELOC’s are seen as the product of greed, I can tell that people paying 3% right now are laughing 😉

Unfortunately, if you just wake up and run to the nearest banks, they will more likely offer you a P+1 HELOC. This is still not bad since you will borrow at only 4%.

The stock market is filled with opportunities

Yeah, you have been hearing the same old track over and over again by financial advisor. Hey, you know what? You hear it because it’s true! Peter Lynch beat the market for 13 years and 50% of the investors that purchased his mutual fund lost money. How come? They sold during rough times and bought more during good year on the market 😉

Well stop listening to your instinct, humans have not been made to trade the market 😉 This is the job of your money only 😉 You don’t believe in mutual fund managers? Can’t blame you as 7 out of 10 don’t beat their index 😉 However, there are index funds and ETF’s which are pretty cheap and guarantee you to be very closed to the index.

Do you really think you can’t create more wealth than 4% on your investment?

You don’t want to invest in the stock market? That’s fair. But it doesn’t mean that you can’t create more wealth by borrowing money. If you have liquidity, you may be able to purchase a rental property and build a strong equity in it since mortgage rates are pretty low. Buying foreclosure properties could be a great alternative to the stock market.

On the other side, you can also start a small sideline and as long as your efforts translate into a return of 4% per year, you are in a good position to create more wealth and improve your net worth.

I personally setup my personal finance so I can access a huge line of credit at a very low rate. I do a smith manoeuvre and increasing my number of shares every month through a systematic investment plan. Then, I took 7K to invest in my own company.

Since the latest has been growing steadily since its creation back in March 2008, I am already covering my interest cost from all my leveraging strategies. When the market will come back, I guess that people will tell me that I am lucky 😉

So you can sit on the bench or pull your helmet and go on the field!

Leverage is a CFD advantage

CFDs offer traders four main advantages. Leverage allows traders to use a fraction of the cost to trade stock. Shorting allows traders to profit from declining prices. CFDs commissions are generally competitive. And a well placed stop loss can limit a trader’s risk.

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July 16, 2008, 6:00 am

Playing on Words with the CRA

by: The Financial Blogger    Category: Financial Planning,Leveraging Strategies

Sometimes, I really love my Country! While we are getting taxed from right, left and center, the Canadian Government is still giving us some room for tax saving in the interpretation of its law. The CCRA, Canadian Revenue Agency, is writing all the rules for tax credit and deductibility. One of most important line in your tax report is probably the line 221: Carrying charges and interest expenses.

In fact, it is a line that is quite important for someone who is interested in leveraging. For example, the legibility of the Smith Manoeuvre depends on this tax rule.

I will refer you to the full description of the line 221 here. However, here are the key points you need to remember:

You are allowed to claim the following charges and interest you paid to earn income from investments:

– Management fees (not MER’s since they are included in your net return but fees related to Private Wealth Management would be a good example).

– Safe-keeping related charges (such as safety deposit box to hold your 1806 Bank of Holland Share Certificates 😉 ).

– Fees for certain investment advice (fees paid to a person who’s principal activity is to give advice about buying or selling stocks).

– Most interest you pay on money you borrow for investments purposes, as long as you use it to earn investment income such as dividend and interest income. The last part of this rule is the most important: if the only earnings your investment can produce are capital gains, you CANNOT claim the interest you paid.

When you first read it, you may think: what is the purpose of borrowing to invest if it’s only to get me GIC returns? Well, this is where the interpretation goes: since they don’t mention that most or the majority of your investment income has to come from dividend or interest sources, you still can invest a part of the money to make capital gains without getting questioned by the CRA. It’s only a matter of playing by the rules (and by their weakness).

I think that the Government didn’t want investors to speculate with borrowed money. However, if you are able to increase your level of income with a good leverage strategy, this is simply good financial planning.

On the other side, having interest and dividend income means that you have less volatile assets in your portfolio which might not be a bad thing when markets are dropping.

The best advice as to know if you can deduct or not your interest and other charges paid to get investment income is definitely to hire an accountant to fill up your tax report correctly and according to the proper rules from the CRA. The last thing you want is to get caught for $5,000 of unpaid taxes because you misinterpret a rule!

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June 20, 2008, 6:00 am

What is the Tax Deductible Mortgage Plan (TDMP)?

by: The Financial Blogger    Category: Leveraging Strategies

An interesting coincidence brought me to write this post about a company called TDMP. About 2 weeks ago, I received two emails from two different readers asking my opinion on the Tax Deductible Mortgage Plan. Since I never heard of this company before (they do not seem to be active in my province), I was really curious about their plan. This is basically a firm offering to setup The Smith Manoeuvre for your financial pleasure.

I am not going to do a review of their service (since I didn’t get paid for it 😉 ) but I will use the example of Chris, one of the two readers, to illustrate which kind of question you should ask a financial advisor when they approach you with such leverage strategy.

What is the strategy?

Chris and his partner make 150K and have a free mortgage property worth 400K. They have been approached by TDMP in order to leverage over their property. This sounds a lot like a Smith Manoeuvre strategy but it is called that tax deductible mortgage plan. The projection was based on a “income fund” providing 8% return per year. So if you have bad debts (i.e. non tax deductible debt); you pay them with your investment returns and you re-borrow the money to invest again. Therefore, you are switching bad debts into good debts.

Hum… let’s say you pay 4.75% (prime rate) on a loan where the interest are tax deductible (therefore a net charge of 3%) and you make 8% per year with your portfolio. This sound very interesting isn’t? Well I don’t think that things can be that easy!

What are the fees and why should I pay them?

According to both readers, TDMP charges $39 a month for the administration fee of the whole setup. While this sounds to me like another hidden / other fee that company charges to improve their profit margin, they may do extra stuff for their client too. Even thought $40 a month seems a lot (since you are still paying interest on the loan and MER’s for your investment), I told Chris to ask them what were they doing for so much a month. An added value would be to keep track of the client’s investment record and interests charged along the year in order to facilitate the completion of their tax report.

In which kind of investment portfolio the leveraged money will go into?

I think this part is a big must as it will determine if you will end-up as the king of the leveraging or another poor victim from “evil” advisor bringing their clients blindly into the abyss of madness.

In Chris’ case, the broker didn’t give much information the first time besides the fact that it will (will? Never use this word as a financial advisor) give a 8% return according to past performance. I must admit that this is kind of odd. The first thing would be to determine the client’s investment profile instead of offering a one fits all fund. Anyway, there is no such thing… regardless the past performance of the fund. Based on that premise, we should all sell Sprott Canadian Equity Fund that has an astonishing record. However, the fund also went down badly a few times since its inception as well!

I guess the main point I am trying to make with this post is do not sign leverage proposal on the first meeting and come back with a lot of questions for the second meeting. My conversation with Chris was obviously lengthier but in the end, it will lead to a second or maybe a third meeting where fundamental questions must be answered. Good luck to you my friend!

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May 2, 2008, 6:53 am

Take The Power Back Part 2

by: The Financial Blogger    Category: Leveraging Strategies,Personal Finance

Yesterday, I wrote about how you can be smarter with your debts as interest rates are going down the hill. The simple act of dropping the interest rates has a much bigger impact than only affecting consumer behaviors. Rate changes are often justified by market fluctuations. When markets are sliding down the banana split, somebody has to do something to keep investor in the sundae cup.

rage against the machine

Unfortunately for them, those who decided to stop eating because the ice cream was not as great as usual are the one you will miss the delicious chocolate sauce sitting at the bottom of the cup (man, I feel I’m in the middle of a Dairy Queen’s commercial!).

If you don’t have much debt, I would strongly suggest using your extra cash flow in order to setup a systematic investment strategy. This will boost your investment portfolio as you will have the possibility to buy more shares for the same price. Once it is set, you will simply have to let the power of compounding interest do its magic.

Another great thing about systematic investments is that you don’t feel market fluctuation that much. The reason is fairly simple. If you invest $500 per month and your portfolio lost $1000 last trimester, you will see your global investment increasing by $500 when you receive your statement.

Of course it is not real growth; it’s the money that you put in during 3 months! However, even though you still loss a $1000, you are not feeling it that much as the global overview seems positive. This will only help you out managing your emotion in times of high market fluctuation.

This is a right timing for leveraging strategies

If you didn’t have stroke recently, you may want to dive into the banana split cup like it’s your last meal by borrowing to invest. The next year might be a bit rough as nobody knows when the madness will stop. However, one thing is for sure; the madness will come to an end. I saw people who leverage at the beginning of 2003. A year before, we had Enron, Worldcom, Tyco and friends that were forging their financial statements. Investors were totally depressed and still, some people leveraged in 2003. Guess what, they are laughing today as they are +80%, +100% 😀

So the bottom line is that we are in a perfect moment for investing and even better for leveraging!



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