Good for you re: completely MER free!

I’m hoping to get there in another year, once the markets come back some and I can sell or transfer some of the higher MER equity funds to bond index funds, for stable growth.

After that, it’s all direct and DRIP investing with CDN dividend-paying stocks.

I totally agree – financial advisors are good for starters, but nobody will ever be more concerned about your money than you. Like everything in life, you need to educate yourself and apply your knowledge to be successful.

Mark

I’m curious…do you follow DRIP investing?

If so, why don’t you include ENB in your stock list?
It seems like a no-brainer?

If you don’t DRIP, why not?

Curious to hear your response.

Continue the good work on the Blog.

Cheers,
Mark in Nepean

So I want an exit strategy. This current market is a good example of why. With the portfolio well under water, or if interest payments went way up, or tax rules on investment expenses changed dramatically, it could become a very uncomfortable situation. So with a retirement date on the horizon, my thought process goes something like this:

Once the entire mortgage is gone, the cash flow from principle payments either gets reinvested or pays off the LOC. Im thinking at the moment that if the portfolio is underwater, I invest the cash flow in new investments. If the portolfio is above water, then I pay off the LOC.

My logic is that any stocks in the portfolio that are underwater are cheaper to buy on the market than they are to “buy” them from my LOC by paying it down.

Ie, Assume I only have 1 stock in the portfolio, and I originally bought 1000 shares for $100 each. The portfolio is now underwater and worth $75,000 instead of $100,000. Every $100 I pay down on the LOC “buys” me one share back. ie, it will take $100,000 to remove the debt from all 1000 shares, and I’m left with $75,000 in investments. when the stock returns to $100, I’ll have just my original $100K.

I’d be better off buying more shares at $75 from the market and holding them until the recovery to $100 happens, then paying down the LOC. $100,000 will buy 1333 shares at $75. when the stock hits $100 again, I can pay off the LOC and now have $133K in investments instead.

The other case is If the portfolio is above water. In this case I’m buying the stocks held in the LOC at a discount to the market price when I pay it down. If the market price is $125 a share, every $100 I pay on the debt buys me 1 share. if I put $100,000 down, I have a $125,000 portfolio.

Will I take the debt down to zero? maybe not… I see some potential value in keeping some interest expense in order to do a form of RRSP melting into TFSA accounts during the early years of retirement, but those are details I haven’t completely worked out yet.

It reduces the long term leveraging effect somewhat, but the SM wasn’t a pure retirement vehicle for us anyway, just a financing tool to offset the loss of capital until we sell the cottage someday. Until then, I also like having the option of then being able to redraw on the LOC should a good buying opportunity come along… and then start the whole process over again :-)

I smell a Non-withholding tax article in the works…

For those of you doing the SM (whether 100% leveraged or not), do you guys have an ‘exit’ strategy. As you note FT, if hyper-inflation does become are reality would any of you consider dropping the strategy?

At some point (% interest differential over your return) the strategy might stop working.

That’s what I have been doing. Remember some of your equities are some pretty solid companies.

Good luck!

I have 2 questions for any takers:
- is the interest entirely deductible? In other words is the 3% ($900) I pay in interest totally deducted from my income for tax purposes?
- Are there any rules of thumb on how much leverage you can take on (based on your net worth, risk-profile, etc)?

I have a question, why is PRFZ.US included in your Smith Manoeuvre Portfolio? Not that there’s anything wrong with the ETF, just wondering why choose something that has a comparatively low yield to be part of the SM portion of your portfolio?

wx_junkie: I personally take a more conservative stance on growth as it’s an unknown. But if I were to pick a number, I would say that 6%-7% growth (before inflation) is a reasonable expectation over 20-30 years.

DGI: I’ve thought about selling options in my SM portfolio to basically collect premiums, but i’m not sure how the tax man would view selling options within a leveraged portfolio. That’s something I’m going to look into.

Can you sell cash secured naked puts for your smith Maneuvre portfolio? that way you could essentially get paid a premium in order to receive the obligation to purchase stock in companies at a certain price and a by certain date. Sometimes you could set the strike price to be way below the current price. You could for example sell TD bank Mar 09 25 puts for 0.75. the stock is trading at $28 US.

I’m looking to start my SM in April, and looks like I’m going to have about 20k room to jump in with…. but like you, I’m hesitant to jump in. I’d like to go 50/50, and keep half to “average down” in a few months, but I fear I might end up averaging up instead. My window is 20-30 years, so me thinks I should not sweat the decision too much either way.

Question for you though – I know you’re big on dividend equities for the purpose of income (and the favorable taxation), and I plan on taking on the same methodology after much reading. Dividend-producers typically have less growth than growth stocks, so what percentage yearly growth do you assume for your calculations for estimating the future worth of your portfolio? 6%? 8%? Or maybe you don’t run a spreadsheet. I do, and I had 8% in there rather than the typical 10%, as I like to be conservative, but this was for growth stocks. I’m thinking this should be lowered somewhat to account for dividend-stocks. Thoughts?

Thanks.

QCash: Thanks for the encouragement, much needed when my updates are in the negative!

Ray: That actually may be a good investment strategy!

Sampson: Right now, I have a lot of cash on the sidelines. I’d like to believe that this is a great time to buy, but the volatility is simply crazy. I’m personally waiting until we have some sort of direction or sign of recovery. However, with that said, I have my eye on a few equities… like the railways.

Qubikal: BMO raised all their rates except their readiline product which is what my HELOC falls under. Maybe I’m lucky?

Mortgage – until 2010 – at 2.05%
LOC – 4% (say 40% tax rate) – 2.6%

Looks like for now, i will be doing the reverse SM…