Ask the Readers: Smith Manoeuvre Advisors?

Written by FrugalTrader on Feb 28, 2009 filed under Ask the Readers

I’ve been getting numerous emails from readers looking for Smith Manoeuvre or leveraged investment advisors in their area. The problem is, I don’t know any, but I’m wondering if you could help me out?

Are you a Smith Manoeuvre advisor? Or, do you know any Smith Manoeuvre advisors in your area?

If so, please contact me via email with the following details:

Full Name.
Contact Information (phone/email).
Advisor/Financial credentials.
Areas that you service.
Investment/Mortgage products that you can provide.
Years working as a Smith Manoeuvre advisor.

30 Comments, Comment or Ping

1. pete smith

I wouldn’t do smith maneouver in this environment

my friend just got divorce because he did SM and his partner didn’t like it and the fact that he lost so much money!!!

Feb 28th, 2009 @ 11:58 am
2. Grant on the Rock

Actually Peter this is probably the best time in the last 10 years to do a SM because of all the bargains out there. Look at any of the big Canadian banks and notice their stock prices have fallen 50%-100% in the last year or 2. It’s too bad your friend and his ex couldnt see this through but it just makes sense that if a couple are going into this they have to be on the same page or you can forget about it. I mean you said it all right there, HE did the SM and his partner did not like it, done before it even started, just my 2 cents.

Feb 28th, 2009 @ 1:19 pm
3. CanadianFinance

I agree with Grant on the Rock. It’s unfortunate, but they shouldn’t have started a SM because they weren’t both on board.

There are certainly quite a few bargains, with a bit of concern about there dividends not being cut.

Even at the previous prices, and losses since, it would have been advisable to hold on to them and not lock in the losses on paper… they will eventually hit their highs again. As long as the dividends are paying more than the interest it’s not too hard to wait.

Feb 28th, 2009 @ 2:03 pm
4. Tommyboy

I agree – this is the BEST time for an SM – I just started my own. Some of the benefits are high yields (due to depressed stock prices), and low cost of borrowing from the bank.

It doesnt matter what happens to the stock value – the point of the SM is to have dividend-producing stocks that supplement your mortgage. The only danger (which has been happening) is if a company decreases or ends it’s dividend.

I am in need of some assistance, too, though. I have 2 income-funds in my portfolio. What’s the tax implication?

Feb 28th, 2009 @ 2:13 pm
5. wx_junkie

I agree with those who are saying this is an excellent time to start. I will be starting ours in April (that’s when my new mortgage will close, buying out my existing mortgage).

I certainly had some convincing to do with my wife, especially since I lost quite a bit over the last 2 years on borrowed $$, but I’ve been able to convince her that with a long-term window like we have (25+ years to retirement), we’re quite safe. She told me not to tell her what the portfolio value is over the next while while the economy tries to recover. I’m not going to try and pick the bottom, I’m just going to invest now, knowing that bargains are out there everywhere.

Feb 28th, 2009 @ 4:50 pm
6. Sampson

I have to disagree that this is ‘the best time’ to start. Maybe its just me, but I’m feeling like there is a lot of uncertainty when it comes to future interest rates.

Certainly the numbers (% return vs. % interest) are on the surface – the most balanced in favor of the SM, but there are two issues. (1) Canadian Finance already mentioned the high possibility companies will cut dividends, and (2) from my meager understanding, all the capital injection by governments will very likely result in a period of above average to extremely high inflation in the near to mid-term.

I just see a huge risk for those borrowing a lot, buying companies who eventually cut dividends, then interest rates pushing or exceeding double digits.

Personally, I’ve been tempted to start the SM – but in all honesty, I’d rate do in an environment where the % yield to interest rate % was small, but the economic environment more stable and certain.

When you are lending away your house, its better to bank a constant 0.5% return for many years, vs. +5% one year, then -5% then next.

Feb 28th, 2009 @ 5:14 pm
7. Tron

While there are certainly risks with any investment, one can limit this risk by setting stop losses or even trailing stops on your position. I am currently speaking to a Mr. Rob Smith (Fraser’s son) on Vancouver Island on setting up the SM. One of the things we need to determine is how much risk my wife and I comfortable with. whether it’s 5 or 10% or 50%, I will ensure there is protection in place. I plan to set up the SM now, but whether or not I start investing at this particular moment, will depend on further analysis of the sectors involved.

Ps. I will contact Mr. Smith and ask his permission to post his conact info here.

Feb 28th, 2009 @ 7:30 pm
8. DAvid

The Smith Manoeuvre Financial Corp was one resource, but today serves a blank page. Possibly an update coming soon?

http://www.smfc.com

David

Feb 28th, 2009 @ 11:18 pm
9. FrugalTrader

DAvid, I believe that Mr. Smith took down his listings for SM advisors a little while back.

Sampson, I think that there is always risk for leveraged investors. The key is to think over the long term (30+ years) rather than shorter term anomalies.

Mar 1st, 2009 @ 8:55 am
10. paul s

Sampson…pay off your mortgage…no risk

Mar 1st, 2009 @ 9:26 am
11. DAvid

FrugalTrader,
Smith’s list on http://www.smithman.net disappeared about a year ago. I thought to allow SMFC to take that part of the business…..

DAvid

Mar 1st, 2009 @ 11:20 am
12. Sampson

Hey FT,

I agree that leveraged investing always has risks and the time horizon should be long term. The question in these particular times is whether those risks are heightened and would you be better off deferring the SM until things settle down. I certainly acknowledge that there are also increased potential for capital gains starting now.

Paul, there’s only so much one can pay off before you have to save/invest again ;)

Mar 1st, 2009 @ 11:38 am
13. Jared

This is a great idea… I have been looking for a list of Potentail Financial advisors to help with the setup of the Smith Manoeuvre

Mar 1st, 2009 @ 12:01 pm
14. The Reverend

I tend to agree with Sampson that I think we’re going to see a sharp increase in interest rates in the next few years once we come out of this recession. Its quite possible the interest rate increases will be faster than the dividend increases at banks (they will probably be cautious to raise their dividends given the difficult positions past increases have put them in today).

All purely speculation, however I’m taking the current low interest rate environment to focus on reducing debt, not take on more.

Mar 1st, 2009 @ 3:37 pm
15. The Nemesis Enforcer

Equities are destined to fall even lower over the next year. We may see a couple of bear market rallies here and there, but for now “Buy and Hold” is a losing proposition. Don’t take my word though. Look at the greatest investor of all time (Warren Buffet’s) latest newsletter to Berkshire shareholders. Inflation is pretty much inevitable at this juncture. The fundamentals of most stocks have changed. The way to make money going forward is to buy those assets where the fundamentals have not changed. I’m talking gold, silver, grains, Crude Oil and oil companies, and certainly Uranium. Yes they have all taken a beating recently. But when things do turn around in the world economy, these will be the first things to rise. Read my lips though, DO NOT use leverage to invest right now. Before you invest in anything, pay down your debts as much as possible and lock in long term debts within the next 12-18 months at the lowest possible rates. If you want to invest, short US long Term Government bonds. This is the last major bubble set to burst. An easy way to do this (even within your RRSP) is to purchase Horizons Beta Pro HTD.TO ETF (2X inverse of US 30 Treasury Bonds). Careful with this vehicle though as it can lose you money if you get in too soon. I’d give it until July/August before I’d nibble in. Don’t get me wrong, the SM is a fantastic long term investment strategy under normal circumstances. If this were an ordinary recession and “sale” on Stocks, I’d say go all in. These are not normal times, and although many of us (including myself) have seen our portfolio’s down by 40% or more, there is still much worse to come.

Mar 1st, 2009 @ 8:56 pm
16. The Nemesis Enforcer

Further to the above, here’s the link to Berkshire’s letter:

http://www.berkshirehathaway.com/letters/2008ltr.pdf

Mar 1st, 2009 @ 9:04 pm
17. Alex

If your time permits, would you mind explaining for our readers how to report on TAX forms all transactions made for SM including capital gain/loses. What supporting docs need to be sent to CRA.

Mar 2nd, 2009 @ 1:36 pm
18. paul s

Sampson
Congrats to you. You have no debt, and you pay for everything with cash. Buy some GICs then.
:-)

Mar 2nd, 2009 @ 6:10 pm
19. financePHI

Like Alex, I would also like to know more about how you can report these as gains and losses on your tax forms. Great article!

Mar 2nd, 2009 @ 8:52 pm
20. Sampson

Paul, I’ve got plenty of debt, and I’m stuck in mortgages that cap annual top-ups – GICs have never matched inflation – so is real RISK of loss of purchasing power over time.

One thing about the SM that doesn’t seem to get mentioned often enough is that you can reduce your interest rate risk by holding your mortgage portion at a fixed rate, and obviously the loan portion is linked to the prime rate.

I wonder if you own a home? Financially, you’re probably better renting, banking the difference in rent vs. mortgage and investing in GICs. – In everything, risk has always been linked to reward. For those comfortable with the SM – and when it works, their reward is a mortgage that is paid off sooner.

Mar 3rd, 2009 @ 3:19 pm
21. Jared

Are you going to post this list?

Mar 11th, 2009 @ 10:04 pm
22. DAvid

Jared,

Maybe it’s a very short list……..

DAvid

Mar 12th, 2009 @ 11:30 am
23. Roo

QUESTION for Newbie SM:

I need help as I am lost at the beginning when the end makes perfect sense.
When first set up with a LOC of 75% (House value x 75%) – Mtg = LOC. If my LOC is $80,000 do I take all $80,000 and immediately invest it? Then as I pay my mtg and say the principle paying down is $275/month it is this amount that is transferred to the LOC and then I pull it out for investing?

So a question comes to mind is if my LOC is $80,000 then I will have over-extended my LOC and so I am S out of luck? Do I tell the broker that he is to increase my LOC by $275 every month above the $80,000?

Should I start my initial investing with $75,000 of the LOC and then continue as per normal and have my broker increase my LOC accordingly?

Huge thanks whoever can help.
CLK

May 8th, 2009 @ 12:59 am
24. FrugalTrader

Roo, the trick to the SM is the readvanceable mortgage. This mortgage will automatically increase your credit limit as you pay down your mortgage. You can read more about the SM here: http://www.milliondollarjourney.com/the-smith-manoeuvre-a-wealth-strategy-part-1.htm

May 8th, 2009 @ 9:20 am
25. Roo

Thanks Frugal.

If I read correctly, once the mtg and LOC are set up, the LOC is only accessible to me when I start to pay down my mortgage?

i.e $500 principle paid down and now $500 LOC available to me to invest.

So ideally it is best to have a high mortgage balance so that I can have access to a equally high LOC.

* I was thinking that if I was set up with a LOC right from the start (say $80,000) that I could use that amount immediately to invest AND THEN as I pay down my mtg principle my LOC would increase in equal size?

Please confirm the top info and questions, but please do comment on this *. maybe I just need a good understanding from my Broker about what I do and how I have access to for this LOC.

Thanks
ROO

May 8th, 2009 @ 4:19 pm
26. FrugalTrader

Roo, a readvanceable mortgage works exactly the same way as a mortgage + HELOC, except that the HELOC credit limit increases as you pay down your regular mortgage.

The formula is:

Home value x 80% – mortgage balance = heloc available

As you pay down your mortgage, the heloc available increases instead of staying static like a regular setup.

So in your case, if initial LOC available is $80k, the available room will increase by $275/month.

May 8th, 2009 @ 4:58 pm
27. cannon_fodder

Roo,

Yes, you can take the entire LOC balance and invest right away. Then each time you pay down your principal you can reborrow that amount and invest it (after paying for any interest charges, of course).

So, if you wanted to get into the market in a big way, you would have the opportunity to do that. If you decided to invest in dividend producing equities, it would probably take a good 3 months before you see a good portion of dividends coming your way.

May 8th, 2009 @ 5:55 pm
28. Jatinder

FT.

I’m in the process of starting SM but bit bogged down about accounting part. Know any accountants/advisors in Ottawa/Orleans area.

Anyways, I plan to start few Canadian DRiPs with OCP/SPP and invest in those using my investment loan. For those who don’t support OCP/SPP or are bit hard to get by, I plan to buy stocks from a broker and then transfer the share certificates to DRiP account (with TA), will it still make my loan deductible. Any accounting problems?

I plan to keep doing this for the whole duration of my investment plan. What happens if I do options to buy stocks?

Any input welcome!

May 12th, 2009 @ 10:19 pm
29. FrugalTrader

Jatinder, I don’t think there will be any problems with an investment loan and purchasing stock via DRIP/SPP. Just make sure to keep a clear paper trail.

When options are bought sold, I believe they are considered capital gains/loss. The rules state that the investment loan must be used to generate income. Even though we know that some capitals gains trading is ok, I’m really not sure about options as they don’t have the potential for income.

Again, you should contact an accountant to help you out with the details.

May 13th, 2009 @ 9:48 am
30. Ed Rempel

Hi Pete Smith, Reverend and Nemesis,

Do you still think that March was a bad time to start the SM? We’ve had a nice relief rally since then.

Our belief is that the #1 quality necessary for investing in equity investments is faith – in humans, markets, long term results and the ability of companies to adapt to market conditions. Our experience is that those that have faith in the markets tend to make money, while those fearful of markets tend to continually miss buying opportunities and end up only feeling safe buying at market highs.

Ed

Jun 23rd, 2009 @ 10:24 pm