- If a person is knowledgeable/skilled/savvy investor and knows what to do with money and is able to generate at least a return north of 3-4% over 20 years – SM is what he should do, he’ll have a better ROI.

- if a person is doesn’t know much about money management, is a high-risk speculator, or leaves money management to someone else and could therefore end up in wrong hands – SM is not for him and he shouldn’t do it.

My two cents….

Then, to service that, I’m going to take my chances with another Can Div paying equity that pays roughly 10.6% yld. I plan to buy 350 shares @ $6 for another $2100 + comm. This will pay me around $18.50/mo.

The interest on HELOC will be around $18/mo ((3240 + 2100 + $40 comm)x4%/12mo). I intend to pay that with the $18.50 monthly dividend in my brokerage account. I think I have to do that for the tax paper trail – any other accts we have are joint accounts, my brokerage acct is in my name only. I believe the interest on the HELOC has to be undeniably paid by me to claim the interest.

The dividend tax credit will apply since the shares will not be in a registered acct & I will claim the monthly interest on my HELOC so the risk seems minimal and it seems like I will receive 8+/- shares a year without having to supplement my brokerage acct or leverage more. I’ll pay a small amount of tax on the dividend income but get more than that back from deductible interest which I can use to pay down the HELOC or my mortgage.

Does anybody see any flaws in that plan? Once I get the refund next year for the deductible interest on my HELOC I’ll likely dig in and set up a separate accounts for my husband & I so we can keep the tax end clean. I doubt we’ll ever be comfortable maxing out our available credit for the SM but I believe we can make our HELOC work harder than it is now. I’d love to get some feedback because it seems there’s alot to consider here.

I’ve just purchased a place at $390,000 and will be putting down a minimum of 20% ($97,500)

I’ll still have about $65000 in RSP and another $55000 in an non-registered investment account. Have a whole life insurance policy that has been funded since 1990 – not sure value right now.

I’m a first time home buyer and wonder if I should just do the accelerated pay off of the mortgage or do the SM. (Also, could also just plop all my savings into the house, but seems like the bad idea with the low interest rate)

So, good candidate for SM?

I posted it on his blog:

http://blog.danwhite.ca/2010/01/03/request-for-info-on-what-happened-with-the-smith-maneurver/#comment-20118

but being the sole ruler of his own, he probably scrapped it after reading.
To be sure, I also sent it to Fraser Smith, let him have a bit of fun.

You seem to have some misconceptions about the SM – and it sounds like you have seen some marketing.

First of all, your credit line is at 6%? Our clients are mostly at prime – 2.25%.

Secondly, you would think that your investments need to make more than the interest rate on the loan, but that is not true. The reason is that the interest is fully deductible, while the capital gains on the investments are taxed at low rates and can be deferred for many years with tax-efficient investments.

In general, if your investments make 2/3 of the interest rate over time, you are making a profit after tax. So, if prime averages, say 4% for the next couple decades, you need to find an investment that makes 2/3 of that, or 2.7% or more after tax long term. That is not particularly hard if you invest effectively.

You refer to setup fees and expenses, but those are usually zero. I have seen some marketing with setup fees and expenses, but there is no reason to pay any. There is no cost for our clients.

If you have seen stories of people going from 10-12 years left on their mortgage to 5-6, you are probably right that those are skewed. We have seen some marketing where they take a large investment loan to invest in a mutual fund paying a ROC (return of capital) monthly distribution. In that case, they do pay off the mortgage, but neglect to say that it is being replaced by a NON-deductible investment loan of the same amount.

Every dollar of ROC distribution taken out of the fund and paid onto the mortgage is a dollar of the investment loan that is no longer deductible.

With the real SM, you only pay the mortgage off a bit faster using your tax refunds. The amount depends on how much you leverage.

The big misconception about the SM is that many people are interested in it as a way to pay off the mortgage fast. It is only a small benefit there.

The real benefit comes from being able to invest a large amount towards your retirement without using your cash flow. If you borrow to invest and then invest effectively, the long term benefits are normally huge.

The versions involving taking money out of the investments to pay off the mortgage more quickly drag down the returns. The real returns come from leaving your investments compound untouched for decades.

I looked at the Forbes 400 richest people. Every last one made their money by borrowing to invest in a company or portfolio of stocks (or inherited it from someone that did). Leveraging into a corporation or equity portfolio is essentially the way all very wealthy people got there.

Ed

Let me put SM into perspective. It is a risky strategy. The main benefit/risk is that it is primarily a leveraged investment strategy.

Therefore, if your investment makes more after tax long term than the interest cost after tax, then it works for you.

The big problem is that so many people panic and sell or become more conservative after a decline – or get too aggressive after a bull market. Or try to market time or invest ineffectively in some other way.

You asked about our clients. We have new clients starting every month. Of course the ones that started with a lump sum in early 2008 are down, but have stayed with it and are more than half way recovered already.

We tell them all ahead of time that there will be bear markets, but they need to be able to stay invested. The key is that those that have faith in the markets and stick with them long term tend to do well. Those that are fearful and focus on trying to avoid losses should not really be doing the SM.

We had a few clients that had the faith to start early last year. They are up a lot! That is the benefit of having the faith to invest when there is panic all around.

Ed

Thanks for the support.

I did find it all very funny. Bob Aaron’s article in the Toronto Star last year quoting Dan White was so far wrong I could only laugh. I’m surprised the Star publishes this stuff.

Where did you write to Dan White? I just checked his blog and your post does not show.

Ed

I didn’t find Mr. White’s article that funny (except the part where he blasts Ed, but that is par for the course and big fun), so, I wrote back to him. Perhaps you would be interested to read my answer, so, here is a copy:

Dear Mr. White,

It appears to me that your anger over Ed Rempel’s comments took away your better judgement.
It also appears that Bob Aaron writes articles about the subject relying on your opinion and you do the same in reversed.
Perhaps you will understand if I risk saying that you both are betraying a certain inexplicable bias towards the Smith Manoeuvre and what is more, misconstrue the implications of the Lipson case.
In fact the Lipson case was a Smith Manoeuvre done in reverse, converting business line of credit into a residential mortgage and to boot, it was done in a blatantly crude and convoluted manner that was doomed from the beginning to fail the GAAR test.
This however, is by no means the equivalent of condemnation of the Smith Manoeuvre.
In fact, you must have learned over the years that applying borrowed money to invest, be that in an active business, or in passive investments, renders the interest tax deductible, as it was clearly and unequivocally determined by the Ludco case and affirmed by IT533 of CRA.
It is quite unfathomable therefore, that the two of you should conduct a veritable “crusade” against this truly effective and beneficial strategy. It is not so much a matter of credentials, but rather a matter of objective judgement. Perhaps, you will understand in the light of the foregoing that I have a reasonable doubt about that objective judgement in your case as well as in Mr. Aaron’s.
What is remaining for you to do, is examining the the principle and the math of the strategy, dispassionately, and see if it makes sense. I suspect that you have not taken this simple step yet. But until you do it is all too early to pronounce any opinion, especially if it is as misconceived as yours above.

Best wishes

Sandor

Thanks for the reply. I’m kinda confused about this SM strategy still… I know a lot of people are saying that it is not risky but in my simple mind. If I takeout money from my HELOC with 6% interest and the advertised expectation for the investment is only 8% then this is a lot of effort for a simple 2% gain + tax deductible – setup fee/expenses and if the investment don’t break even then I’m down for that year. I’m really interested in shaving the years off my mortgage but hearing stories that people can go from 10-12 yrs to 5-6 yrs still seem somewhat skewed to me…