January 8, 2008, 7:00 am

Smith Manoeuvre End of Year Update

by: The Financial Blogger    Category: Smith Manoeuvre
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I started my Smith Manoeuvre adventure in February 2006 with great hopes. In fact, I started leveraging with a regular line of credit in 2004 until I decided to make the big move to the SM with my HELOC. Did I do well? Did I learn something out of my first year of leveraging through my property? What are my leveraging plans for next year? Read what follows and you will find out!

house money

The Results

I decided to start with the bad news right away. When we look at my first year’s return, the SM was definitely not a success. As of Jan 3rd, I was -8.25%. I had borrowed $5,691.39 over the year and my funds value is at $5,221.60. This is definitely not impressing and a bit disappointing especially considering the fact that I decided to invest in the NBC Dividend funds for its strong yield history and low volatility profile. In fact, it was voted as one of the less volatile Canadian dividend fund on the market by Morningstar!Another thing that I have to keep in mind is the interest I paid over the year. I actually paid a total of $98.49. This should be counted in my lost and therefore, decrease my overall return to 9.98%. I would have been better off stocking barrel of gas in my basement for a year!At least, I will be getting 42% of this amount back as it is tax deductible… big deal!

The Lessons
The Smith Manoeuvre is definitely a great tool for learning how leveraging strategies work as it is a progressive investment plan. While I lost nearly 10% (plus interest paid on my line of credit), it doesn’t represent much in the end (about $500).I learned that putting all my money into one funds increase my risk and I was definitely penalized by the size of my portfolio for the first year. Starting in 2008, I will probably try to diversify my investments. My first move will be to buy the Sprott Canadian Equity fund probably next month.I will probably increase my SM payment this year as I was able to free up some cash flow by restructuring my debts through my property.In the end, I am quite satisfied with this first year using the Smith Manoeuvre as it has been a great learning experience and I think I will be able to come up

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I recently read Unconventional Success (great book), which points out an important problem – Morningstar rates funds that have performed well or were less volatile. They try hard to make it sound like more than it is, but it’s all about the past. I’m sure they rated funds investing in sub-prime mortgages as “stable” and “performing well” until last year.

I would probably be sticking to index funds if I did this, but after checking out the Sprott fund I’m impressed that it has actually closed to new investors at times – it may be one of the few good ones.

by: The Financial Blogger | January 8th, 2008 (3:37 pm)

Going with EFT’s might not be a stupid idea! However, I still think that Sprott can beat the market. My guess is that they closed at one point in time because they could not find enough good opportunities and the size of the mutual funds might have hurt his investment returns.

Thanks , great article

To your advance success,

Tracy Ho

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