Archive for December, 2007

DIY Smith Manoeuvre, Part 4

December 16, 2007

8 comments

This is the fourth part in a series on implementing a do-it-yourself Smith Manoeuvre. You may also want to check out Part 1, Part 2 and Part 3 of the series.

Now that you are regularly withdrawing funds from the loan portion of your readvanceable mortgage and investing the proceeds in equities, there is only one step left: taxes. You should keep track of the interest paid on the investment loan, calculate the total interest expenses for the financial year and report it in Schedule 4 and Line 221 of your T1 General.

When your tax return is processed and a refund is issued, you should use the refund to pay down your mortgage and take out a loan and invest it to get the full benefit of the Smith Manoeuvre.

Notes:

  • I’ve said this before and I’ll say it again: Check with your accountant before implementing the SM. I’ve personally never borrowed money, invested it in index funds and claimed a tax deduction of the interest expense. So, check with your accountant or tax advisor.
  • Despite the complexity, SM is simply a leveraging strategy. As you may know, leverage cuts both ways. There is no guarantee that even over the very long term, equities will return more than the interest you pay on the loan. That’s the risk of implementing the SM. Don’t believe anyone who tells you otherwise.
  • In the interests of full disclosure, I have no intention of implementing the SM. I simply pay down the mortgage and am happy with guaranteed, risk-free, after-tax return of roughly 5%.
  • An adverse tax ruling is a risk with the SM and even if interest deductions are currently allowed, they may not be in the future. For example, in the 2004 Quebec budget, interest deduction was limited to the amount of interest income in that year.
  • This and That

    December 14, 2007

    18 comments
    1. Time is running out if you want to take advantage of some tax breaks for the 2007 tax year. You can also add RESP contributions to the list.
    2. Just in time for the holiday season: “Eight tips for the office party”.
    3. While his approach to investing might be boring, the same epithet doesn’t apply to William Bernstein, author of The Four Pillars of Investing, recently quoted in The Globe and Mail.
    4. Jonathan Chevreau writes about yet another study that shows how chasing performance negatively affects investment returns.
    5. A hot fund could easily turn cold, so beware of investing based on past performance. Rob Carrick relates the story of formerly high-flying Mackenzie Ivy Canadian Fund.
    6. Ellen Roseman writes about an investor who sold equities anticipating a market decline and parked the proceeds in commercial notes when his adviser suggested that the notes have an “AAA rating, better than many government bonds”.

    Blog Roundup

    1. Canadian Dream pointed out the dangers of comparing net worth in response to a post by Million Dollar Journey. I’m curious if readers really care to know a blogger’s net worth.
    2. Steady Hand’s Tom Bradley notes that “I don’t want any of my money in the U.S.” is a common refrain these days.
    3. Many readers had pointed out the TD Mutual funds does not handle grants other than the basic CESG. Larry MacDonald suggests checking out if your RESP provider can handle all the grants you are eligible for.
    4. Canadian Financial DIY suggests how to construct a portfolio from scratch.

    Book Review: No Hype – The Straight Goods on Investing Your Money

    December 11, 2007

    13 comments
    [Front cover of Your Money & Your Brain]

    Though I don’t necessarily agree that her approach to picking individual stocks is suitable for a beginning investor, it is easy to see why author Gail Bebee has earned plaudits from Ellen Roseman, Larry MacDonald, Jon Chevreau and others. This self-published, slim book running a mere 194 pages largely delivers on the promise to provide its readers with the knowledge to “cut through the investment industry hype and profitably invest your hard-earned money”. Ms. Bebee is not a financial insider; she has a graduate degree in engineering and relates a regrettably common experience on how she became a d-i-y investor after she learned that her RRSPs were best investments for her broker, not her family.

    A newbie investor would find the book invaluable as no prior familiarity with investing is assumed. Ms. Bebee starts with the basics (rule of 72, compounding etc.), talks about service providers such as financial advisors, progresses to asset classes, dishes out the dirt on cash, bonds, stocks, mutual funds, ETFs etc. and finally discusses RRSPs, RESPs and model portfolios. You can find the full Table of Contents on her website.

    I do have a few quibbles with her book. I cringed when I read the section on “Ten Steps to Select Winning Stocks” and an entire chapter on market timing. Also, a list of books for progressing beyond the Investing 101 stage would have been useful. Still, the list of positives found in the book far outweighs my nit picking. The book earns a strong recommendation just for the long list of investments (principal-protected notes, high-fee mutual funds, venture capital funds etc.) the author thinks are terrible for the average investor.

    The book retails for $23.95 and is available from the author’s website.