# Smith Manoeuvre on Mortgage + Monthly Dividend Portfolio Idea



## mikescool (Mar 17, 2013)

Hello guys,

Long time lurker, great community!  finally decided to register and get some advice from you guys.

I'm thinking of executing a smith manoeuvre on my mortgage, please let me know what you guys think. (sorry if my post is really long i'm basically thinking out loud)

by the way for those interested but don't know what a smith manoeuvre is, this post by vern @ milliondollarjourny sums it up quite well:

"I understand now that the point of the SM is get all of your mortgage debt converted to investment debt. Thus your house is paid off and you are no longer obligated to make principle and interest payments but only interest payments, which in turn are reduced by the tax deduction. Meanwhile the money you would have set aside for principle payments are now free to use for investment thus making your investments grow even faster than interest on your HELOC ever could. On paper you would still owe the value of home but the speed of growth and size of your investment portfolio means you’re well in the black."

so my situation:

purchase price: 1.22 million
mortgage: 910K
rate: 2.89% 5 year fixed on mortgage
3.00% (prime rate) on HELOC

I have the option of structuring the 910K like this:
up to a max of 85% as a HELOC
up to a min of 15% as mortgage

based on my cash-flow i'm thinking of 

400K as HELOC 
510K as Mortgage

All HELOC invested in monthly dividend paying stocks, allowing me to claim tax-credit on the interest paid on the HELOC

My marginal tax rate = 46.41%
I pay ~ 74k in income tax/year
HELOC interest compounded monthly @ 3% = (0.03/12)*400K = 1000$/month or 12K/annum
claimable tax credit = marginal tax rate * interest paid on leveraged investment - this works out to be 0.4641*12k=5569.2$
Net interest paid/year = 6430.8$
Real interest on HELOC after tax credit ~ 1.6077%

Now to put the 400K to work (all in equities producing monthly dividend):

*data can be found on http://www.canadastockchannel.com/dividends/

füll watch list of equities:

EXTENDICARE INC	EXE
Cominar Real Estate Investment Trust	CUF.UN
Torstar Corporation	TS.B
PETROBAKKEN ENERGY LTD	PBN
Just Energy Group Inc	JE
Medical Facilities Corp	DR
Dundee Real Estate Investment Trust	D.UN
Ag Growth International Inc	AFN
Crescent Point Energy Corp	CPG
Bird Construction Inc	BDT
Wajax Corp	WJX
Twin Butte Energy Ltd.	TBE
BCE Inc.	BCE
National Bank of Canada	NA
Canadian Imperial Bank of Commerce	CM
Artis Real Estate Investment Trust	AX.UN
Canadian Oil Sands Ltd	COS
Penn West Petroleum Ltd	PWT
Pengrowth Energy Corp	PGF
TransAlta Corporation	TA
Veresen Inc	VSN
Enerplus Corp	ERF
H&R Real Estate Investment Trust	HR.UN
Manitoba Telecom Services	MBT
Bank of Montreal	BMO
Student Transportation Inc.	STB
Sun Life Financial Inc.	SLF

random allocation example from this list:

5% allocation in EXE: ~10.3% Div payout since 09/12 at purchase price 
5% allocation in CUF: ~ 6.39% Div payout since 09/08 at purchase price
5% allocation in TS: ~ 7.03% div payout since 09/11 at purchase price
5% allocation in PBN: ~ 9.5 % div payout since 10/09 at purchase price
5% allocation in JE ~ 17.10% Div payout since 09/08 at purchase price
5% allocation in DR ~ 7.57% Div payout since 01/07 at purchase price
5% allocation in D.UN: ~6.04% Div payout since 07/05 at purchase price
5% allocation in AFN: ~7.36% Div payout since 06/06 at purchase price
5% allocation in CPG: ~6.94% Div payout since 01/05 at purchase price
5% allocation in BDT: ~5.66% Div payout since 04/11 at purchase price 
5% allocation in WJX: ~ 8.07% Div payout since 05/12 at purchase price
5% allocation in TBE: ~ 8.04% Div payout since 09/12 at purchase price
10% allocation in BCE: ~5% Div payout @ PP
10% allocation in NA: ~4.3% Div payout @ PP
10% allocation in CM: ~ 4.57% Div payout @ PP
10% allocation in AX: ~ 6.7% Div payout @ PP

expected annual payout in dividend: ~7.00% amounting to 28K 
marginal tax rate on eligible dividend 29.54%
net payout for div: 28,000*(1-0.2954)= $19729
net payout minus non-credited interest paid on HELOC = 13,298$

all things being equal i make 13k extra a year on dividend only, which will be used to pay back the non-deductible mortgage. not planning on selling anything for capital gain since that affects tax-rebate elgibility according to: http://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm

on paper it seems like a good plan, but obviously dividends maybe cut etc, market could crash, companies can go bankrupt etc. 

what do you guys think? is the portfolio too risky? should i allocate more to large caps? do you guys have suggestions? is anyone doing a similar strategy? all feedback are welcomed!

some points of consideration against risk:
i have other properties worth about 700-800K, in case something crazy happens like the bank calling back to HELOC i guess i can liquidate those assets to pay it back if there is heavy loss on the leveraged portfolio. this is obviously a last last resort
have a maxed out TSFA invested in growth ETFs, which i can liquidate very quickly, but it's only around 20k

some resources i have gathered:

keeping the HELOC tax deductible: http://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm

why not use ETF for the leveraged portfolio? http://www.milliondollarjourney.com/why-i-dont-use-a-dividend-etf-for-my-leveraged-portfolio.htm

http://www.milliondollarjourney.com/smith-manoeuvre-portfolio-february-2013.htm 
he is also executing a similar strat and have posted his feb portfolio

all posts related to SM: http://www.milliondollarjourney.com/category/smith-manoeuvre

after you have paid back all your mortgage: http://www.milliondollarjourney.com/an-investment-loan-and-excess-cash.htm#lQ1dU3izTXbS7ZY0.99 

thanks a lot,

Mike


----------



## doctrine (Sep 30, 2011)

You have selected a couple of risky stocks. I would immediately screen out TA, PBN, JE (already cut it's dividend by 30%), and TS.B. You may want some higher quality, lower dividend yielding companies to complement your mix. A Smith Maneuver is a long term strategy, so the most important issue should be the sustainability of the dividend, and future growth. Any company with dividends greater than 100% of net earnings should be immediately screened out. You also have a lot of energy companies on that mix, so you have to screen those companies extra carefully to ensure they can sustain 5+ years of current oil prices. Also, the REITs have Return of Capital components which will have to be managed carefully to maintain full interest deduction eligibility. 

If you lowered your average target yield to 5%, you might be able to get more dividend growth in your portfolio. It would also help to protect your capital.


----------



## mikescool (Mar 17, 2013)

doctrine said:


> You have selected a couple of risky stocks. I would immediately screen out TA, PBN, JE (already cut it's dividend by 30%), and TS.B. You may want some higher quality, lower dividend yielding companies to complement your mix. A Smith Maneuver is a long term strategy, so the most important issue should be the sustainability of the dividend, and future growth. Any company with dividends greater than 100% of net earnings should be immediately screened out. You also have a lot of energy companies on that mix, so you have to screen those companies extra carefully to ensure they can sustain 5+ years of current oil prices. Also, the REITs have Return of Capital components which will have to be managed carefully to maintain full interest deduction eligibility.
> 
> If you lowered your average target yield to 5%, you might be able to get more dividend growth in your portfolio. It would also help to protect your capital.


Hi doctrine,

thanks for the insight. by the way i took a look at your blog as well. i'm going to refine the list a bit and dig a bit deeper. i'm going to come up with 10-15 stocks based on some of the criteria you have in your blog as well. 

i'll post that up and hopefully can get your feedback on it


----------



## Spudd (Oct 11, 2011)

EXE also seems to be a very risky one. If you look at the charts of their annual revenue it's on a steady down trend. Not what you like to see, especially when it's borrowed money you're investing. Note: my info is probably like 6 months out of date, as I haven't looked at them lately. Anyway, be sure to look at the fundamentals and make sure you choose reliable companies.


----------



## blin10 (Jun 27, 2011)

got a question, using this example below from the site you posted:

_"4. When tax season hits, deduct the annual amount of interest that you paid on your HELOC against your income. So, if you paid $6,000 in interest payments for the year and you have marginal tax rate of 40%, you will get back ~$2,400 of it."_

when they say "you will get back $2400 of it", how do they mean it? do they mean government will send you a refund check for $2400 ? or?


----------



## mikescool (Mar 17, 2013)

hey blin, usually I have to pay more than the tax automatically deducted from my salary. 

so i'm assuming the bill sent to me from the IRS will be less the tax credit. 
OR if you overpaid they'll send you a cheque. 

someone correct me if i'm wrong.


----------



## blin10 (Jun 27, 2011)

so what you're saying is, based on my example, if you have to pay let's say $20,000 in taxes they will just minus the $2400 and your new tax bill will be $17600 ?


----------



## andrewf (Mar 1, 2010)

IRS is the US tax collection agency. You are resident in Canada, right?

blin: if you pay $6k in interest on investment loans, you deduct $6k from your income, and pay tax on the reduced income.


----------



## mikescool (Mar 17, 2013)

andrewf said:


> IRS is the US tax collection agency. You are resident in Canada, right?
> 
> blin: if you pay $6k in interest on investment loans, you deduct $6k from your income, and pay tax on the reduced income.


sorry was working in the US for a bit, got everything mixed up as i just came back to Canada, but yes i am canadian citizen haha.


----------



## arrow1963 (Nov 22, 2011)

I'm not sure if I missed something in the initial post... Which 'smith manoeuvre' are you looking to implement?

The one I'm most familiar with would involve 'stripping out' the equity you build every month by paying down your mortgage, and using that to build a leveraged stock portfolio. That doesn't appear to be what you're talking about here.

Are you talking about something like the 'Rempel Maximum', where you borrow against the new equity in your house to pay the interest on an investment loan? That's the only explanation I have for why you're talking about a $400,000 portfolio, when, from what I can tell, you don't have any equity in your house with which to start investing (you do have 20% down, but it appears as though the loan maximum is 80%).

I'd appreciate it if you could explain that a little better.


----------



## Eclectic12 (Oct 20, 2010)

mikescool said:


> ... I'm thinking of executing a smith manoeuvre on my mortgage, please let me know what you guys think. ...
> 
> All HELOC invested in monthly dividend paying stocks, allowing me to claim tax-credit on the interest paid on the HELOC ....


I understood it as writing off the interest against income so I don't believe there's any tax-credit involved. Maybe a refund as more taxes may have been with-held than needed as the interest deduction was not known about by the source that is with-holding income taxes. 

The stocks that pay eligible dividends will have the dividend tax credit but that is from owning the stock, not borrowing to invest.


In any case, you say dividends yet your list below definitely includes return of capital (Roc) which will reduce the tax deductability of interest.



mikescool said:


> ... füll watch list of equities:
> 
> Cominar Real Estate Investment Trust	CUF.UN
> Dundee Real Estate Investment Trust	D.UN
> ...


Using Cominar as an example, this link:
http://www.cominar.com/ENGLISH/info_Fiscales_EN.html
says that of $1.44 paid, the breakdown is 3.5% as income, 4.11% is capital gains and 92.39% (or $1.33) is RoC. There's no dividend being paid.

If you check out the key tax considerations link, it says:


> This includes Return Of Capital funds/income trusts also! Technically, as you receive ROC distributions, it will decrease the tax deductibility of the investment loan . This can be avoided by using the ROC to pay down the investment loan, then re-investing if desired. Technically, this “should” be the same as simply leaving the ROC distributions in the investment account (confirm with your accountant).


If you plan on these investments, what is your plan to keep the loan tax deductible for the investments that pay RoC?




mikescool said:


> ... all things being equal i make 13k extra a year on dividend only, which will be used to pay back the non-deductible mortgage. not planning on selling anything for capital gain since that affects tax-rebate elgibility according to: http://www.milliondollarjourney.com/key-tax-considerations-on-an-investment-loan.htm ...


As indicated about, this portfolio is not dividend only - so there will be extra steps required to keep the interest 100% tax deductible.

As well, my understanding is that selling for a capital gain won't affect the tax deductability. Selling a stock for a CG, *withdrawing the CG and using it for anything except paying down the loan will have this affect.*

There's a CRA interpretation bulletin that walks through the example of selling stock A for $10K and splitting the proceeds to buy $7K of stock B and $3K of stock C, the interpretation is that the interest charges stay tax deductible (i.e. does not withdraw the CG).


Cheers


*Edit:* Note that I'm not saying the RoC investments are impossible to use, it appears there's more research and planning needed. Otherwise, you may end up with more work than intended or CRA headaches if audited.


----------



## mikescool (Mar 17, 2013)

arrow1963 said:


> I'm not sure if I missed something in the initial post... Which 'smith manoeuvre' are you looking to implement?
> 
> The one I'm most familiar with would involve 'stripping out' the equity you build every month by paying down your mortgage, and using that to build a leveraged stock portfolio. That doesn't appear to be what you're talking about here.
> 
> ...


Hi arrow,

Basically my mortgage advisor said:

The mortgage = 910k
She is able to split that mortgage into a LOC and a regular mortgage in any ratio, with up to 85 percent of the 910k going to the LOC (and the remaining as a mortgage).

Let's say I opt to take the loan as 510k mortgage and 400k LOC then I would have 400k to work with immediately.

Also every time I pay back the mortgage I would have the principle automatically added to my available LOC as you described in your post.

Does this make sense to you?


----------



## Spudd (Oct 11, 2011)

No, that's not correct. You will have 510k as a mortgage and 400k owing on a LOC. Every time you pay back the mortgage it will add space to your LOC. So, if the first month you pay down 10k on the mortgage, you will then have a 500k mortgage, and a 410k LOC with a 400k balance on it. As this space arises, you can then take THAT money (in this case, 10k) and buy stocks with it, and the interest on that 10k will be tax deductible. However, the issue is that there will be interest owing on the mortgage part of your LOC as well as interest on the investment part, so record-keeping will be challenging and very important.


----------



## mikescool (Mar 17, 2013)

Eclectic12 said:


> I understood it as writing off the interest against income so I don't believe there's any tax-credit involved. Maybe a refund as more taxes may have been with-held than needed as the interest deduction was not known about by the source that is with-holding income taxes.
> 
> The stocks that pay eligible dividends will have the dividend tax credit but that is from owning the stock, not borrowing to invest.
> 
> ...


Hello eclectic, 

Yes you are right I used the wrong term. I meant the interest paid on the LOC can be used to write off income.

I need to do more research into the ROC factor as I don't understand it completely so thanks for the tip!

By the way I'm thinking of contacting Ed Rempel, he regularly posts on that blog in the comments section and seems very knowledgeable. I know a lot of you have reservations against Financial planners but did anyone work with him before? 

Thanks!


----------



## andrewf (Mar 1, 2010)

So you have sufficient equity to draw $400k on a HELOC? Or is the outstanding mortgage balance $910k?

In other words, is this a refinance?


----------



## mikescool (Mar 17, 2013)

Spudd said:


> No, that's not correct. You will have 510k as a mortgage and 400k owing on a LOC. Every time you pay back the mortgage it will add space to your LOC. So, if the first month you pay down 10k on the mortgage, you will then have a 500k mortgage, and a 410k LOC with a 400k balance on it. As this space arises, you can then take THAT money (in this case, 10k) and buy stocks with it, and the interest on that 10k will be tax deductible. However, the issue is that there will be interest owing on the mortgage part of your LOC as well as interest on the investment part, so record-keeping will be challenging and very important.


Ah so the 400k LOC is not tax deductible? Then there is no point of taking out this LOC at all then. Might as well go all mortgage haha


----------



## mikescool (Mar 17, 2013)

andrewf said:


> So you have sufficient equity to draw $400k on a HELOC? Or is the outstanding mortgage balance $910k?
> 
> In other words, is this a refinance?


I misunderstood the concept. Now I understand you have to borrow against your existing home equity. Which I have non at the moment!


----------



## andrewf (Mar 1, 2010)

How were you planning on paying for the equities?


----------



## mikescool (Mar 17, 2013)

I have 2 other properties that is worth 600 to 700k. I guess I can sell those.
Max out TSFA 
Max out RRSPs 

Dump the rest into the house, then use the HELOC now available to purchase the equities. 

Dealing with rental properties is a headache.

Have to think more on this plan though


----------



## Sampson (Apr 3, 2009)

If you have $2.5M worth of real estate assets yet virtually no equities, bonds, cash or other asset classes then, yes, by all means diversify your wealth out of real estate.

Depending on whether you are a full DIYer or not, you could easily hire an accountant to help you structure your loans properly.

It isn't the hardest thing to figure out, but make sure you do it properly, otherwise at these mortgage values, you could make a claim and CRA challanges at which point you might be forced to pay back tens upon tens of thousands of dollars worth of tax rebate.


----------



## andrewf (Mar 1, 2010)

If you have that much exposure to real estate, it's probably a good idea to diversify.


----------



## mikescool (Mar 17, 2013)

Spudd said:


> No, that's not correct. You will have 510k as a mortgage and 400k owing on a LOC. Every time you pay back the mortgage it will add space to your LOC. So, if the first month you pay down 10k on the mortgage, you will then have a 500k mortgage, and a 410k LOC with a 400k balance on it. As this space arises, you can then take THAT money (in this case, 10k) and buy stocks with it, and the interest on that 10k will be tax deductible. However, the issue is that there will be interest owing on the mortgage part of your LOC as well as interest on the investment part, so record-keeping will be challenging and very important.


spudd, just to confirm if i use the 400K LOC to buy stocks, it will not qualify for tax deductibility? technically I am still borrowing money to invest?

then i can use the principle payment on the regular mortgage payment to cover the interest on the LOC.


----------



## jcgd (Oct 30, 2011)

Mike, the $400k loc would just be the mortgage debt moved to a new format. You owe $910k on your house right now. If you refinance $500k into a mortgage and the $410 into a LOC you still owe $910k, so there is no money to invest. 

You could take out a brand new LOC and invest that, but that will add on top of the $910k you already owe for your house. 

You don't really want to invest a Loc because the interest rate is higher. You want to get a home equity line of credit, or a HELOC. Right now your HELOC would have a limit of $0 because you only have 20% equity in your home. If you pay down your mortgage from this point, you could get an equivalent increase in the HELOC. So if you pay off $20K of your mortgage you could borrow $20k on a HELOC to invest. That $20k that is used to invest would have tax deductible interest.


----------



## mikescool (Mar 17, 2013)

jcgd said:


> Mike, the $400k loc would just be the mortgage debt moved to a new format. You owe $910k on your house right now. If you refinance $500k into a mortgage and the $410 into a LOC you still owe $910k, so there is no money to invest.
> 
> You could take out a brand new LOC and invest that, but that will add on top of the $910k you already owe for your house.
> 
> You don't really want to invest a Loc because the interest rate is higher. You want to get a home equity line of credit, or a HELOC. Right now your HELOC would have a limit of $0 because you only have 20% equity in your home. If you pay down your mortgage from this point, you could get an equivalent increase in the HELOC. So if you pay off $20K of your mortgage you could borrow $20k on a HELOC to invest. That $20k that is used to invest would have tax deductible interest.


Got it. Let me know if you think this make sense.

1. Take the loan as 100% mortgage. (910K in mortgage)
2. Pay down the mortgage (works out to be 3.8k/months approx) *noted i should choose the biweekly option so i can make more payments/year
3. I confirmed that the mortgage is setup in a way where the principle paid on each monthly instalment is automatically added into the HELOC
4. Use the available credit to purchase stocks/investment products in an unregistered portfolio.
5. **Somehow recapitalize the interest on the HELOC (i don't quite understand this part, if someone can explain it that'd be great)
6. Use dividend generated from the stocks/investment products to further pay off the mortgage
7. repeat until mortgage is fully converted into HELOC 

Now a couple of questions:

- I have a 20% prepayment option on the mortgage, assuming I have additional cash available to make this 20% prepayment, would it be a better idea to just invest the money myself into ETFs (Vanguard, iShares Index ETFs) instead of paying off the mortgage? I don't see the advantage of dumping money into a 2.89% rate fixed for 5 years when some ETFs are paying ~4% yield. Or i can use the strategy of investing in tax-efficient dividend paying stocks and collect the dividend (again <2.89% return even with tax factored in). So is there any point of putting the money into the mortgage and then borrowing it back at prime, get a tax deduction, and investing it again? 

thanks for the advice guys!


----------



## andrewf (Mar 1, 2010)

If you are in the 46% tax bracket, there is a good chance that it makes sense to prepay then re-advance to invest. This is because avoiding 2.89% non-deductible interest (your mortgage) is like earning 5.35% pre-tax.


----------



## arrow1963 (Nov 22, 2011)

Can you clarify what the situation is with these 2 other properties you own, worth ~$1.3M?

If you own them outright,or have significant equity in them, why not just borrow against them to fund a leveraged share portfolio?


----------



## Young&Ambitious (Aug 11, 2010)

What arrow said. Why not take out a HELOC against the rental properties and leverage those to invest instead? What are your rates of return on those investment properties btw? They are cashflow positive right?


----------



## mikescool (Mar 17, 2013)

Property 1 is the house i'm living in right now. It's worth about 600-700K but i'm planning on selling it because i'm moving to the new house that i'm taking out the mortgage for. This house has been paid off a long time ago. There are no HELOC or anything against it.

Property 2 is a condo that i bought and is currently renting out. it's worth about 500-600k now last time i checked. Bought for 450K 3 years ago, rent is 2300/month. I still have about 100K to go on that mortgage. But the problem is i don't want to deal with renting it out anymore, it's very annoying to deal with tenants sometimes and i don't need the extra stress. So i'm thinking of selling both the properties straight out.

so if i sell them both outright i can get between 1 to 1.2 million in cash. If i do that i have the option of paying off the new house immediately with about 150-300k in cash left over.


----------



## arrow1963 (Nov 22, 2011)

Great. You don't need the smith manouevre.

If you want to borrow to invest $400,000 worth of stocks, either:

- sell your potential rental properties, pay down your mortgage, and re-borrow the equity to invest, or

- don't sell the rental properties, and take a loan against the equity you hold in them.

Personally, this seems like a lot of risk to me. I'd question whether this is something you need to do to meet your long term goals. It sounds like you have a good income and a bunch of assets, is it worth complicating (and endangering) your current set up by leveraging into stocks?


----------



## mikescool (Mar 17, 2013)

arrow1963 said:


> Great. You don't need the smith manouevre.
> 
> If you want to borrow to invest $400,000 worth of stocks, either:
> 
> ...


good point. what do you think about this:

hypothetically if i sell off the properties for a total of 1 million in cash.

year 1: I pay the 20% prepayment option on the mortgage immediately. on 910k that's 180k down. I'm left with 820K in cash. 
I invest the 820K into dividend paying blue chip stocks and ETFs for 1 year. 
year 2: I liquidate 180k worth of stocks/ETFs pay the 20% prepayment option on the mortgage immediately. 
so on and so on until i have paid off my entire mortgage

so basically i also have the option of taking out the HELOC and add it back into the portfolio but yes that would be leveraging and i understand the risk associated with it. 

I also have the option of taking out the 910K as a maximum of 720K as an LOC and 190K as a mortgage.
I can then sell both properties, pay the entire LOC back immediately, and only have a 190K mortgage to keep for 5 years. this will save me quite a bit on interest paid. but the risk is i'm not sure how fast i can sell the properties. and having to pay interest on a 720K LOC is not that fun.

hmmmm... decisions decisions.


----------



## jcgd (Oct 30, 2011)

I generally think it's a good idea to use some leverage. Not too much though, and you must be very careful about when you add leverage. 

Mike, I would consider selling the properties you don't need, especially if you have a large percentage of your net worth in real estate. I would then try to reduce the mortgage of your primary residence. Maybe not pay it all off, possibly keep a few hundred grand to invest. 

I would consider the large risk that real estate is overvalued. I would also not want to invest a large sum into the market at this point. In my opinion, it is time to have a little cash as most people are trying to get their cash into the market. I would slowly invest cash into the market over time, rather then all at once. Just keep in mind that if the market starts to fall you want to add more money in, rather then wait for prices to rebound. The more they fall, the less the risk. You really want to do the opposite of what most people do. When everybody is sitting out, get in. When everybody is getting in, sit out. 

Since you obviously have a decent income a fee based advisor would likely be a good investment. I would find someone you trust and have them help you create a plan. We really don't know enough about you and your life to give you sound advice. 

Your questions earlier in the thread, and your misunderstanding of your Smith maneuver idea make it evident that you are not well educated about finance and would benefit from professional advise. You do seem very adept at making money, so I would concentrate on that and leave the investing to a profession, at least while you learn to DIY if that is something that interests you.


----------



## RBull (Jan 20, 2013)

it's been entertaining reading this thread. It's taken a while but now we know more about your overall situation mc. 

I'm with arrow1963 on the options and the question about so much leverage into stocks, and question at the same time what appears to be so much equity in a possibly declining asset-RE?


----------



## mikescool (Mar 17, 2013)

jcgd said:


> I generally think it's a good idea to use some leverage. Not too much though, and you must be very careful about when you add leverage.
> 
> Mike, I would consider selling the properties you don't need, especially if you have a large percentage of your net worth in real estate. I would then try to reduce the mortgage of your primary residence. Maybe not pay it all off, possibly keep a few hundred grand to invest.
> 
> ...


I am very interested in learning how to DIY and i have been reading up on it for the past month or so. But i think you are right, at this point it would not hurt to get a fee based advisor to create a professional plan while i figure out the nuances of DIY investing 

any recommendations on those?

PS. I work in Private Equity, so on good years you make alot, but when there's no deals then it's all downhill haha. Kinda of funny how i work in the finance industry yet know so little about personal wealthy management. Maybe i was too concentrated on trying to spend the money i made instead of investing it properly! i'm also trying to change this habit as well. very very bad habit to get into haha


----------



## arrow1963 (Nov 22, 2011)

One more option to consider....

Moshe Milevsky has a book out called 'Are You A Stock or a Bond', in which he argues that you should consider your human capital (net present value of future earnings) in your investment allocation. I just looked it up on amazon to get a link, and see that the e-book is free.

http://www.amazon.com/Are-You-Stock-Bond-Financial/dp/0133115291


It sounds like your income is 'stock like', in that it is variable and is correlated with the health of the economy, and local equity markets? If that is true, and you're comfortable with the approach outlined in the book, it would suggest that you should have less risk in your investments (to bring your overall risky / non risky allocation into balance).

You haven't mentioned what the size or composition of your RRSP is, but apart from that, every investment in your life has been 'equity based' (and/or built on debt):

- home ownership
- real estate investments
- stocks in TFSA
- loans for real estate & RE investments
- loan for leveraged stock portfolio?

I guess the other thing you could do, if it matched your goals and preferences (which I assume it doesn't, because you haven't mentioned it), would be to implement something like a 60/40 stock/bond portfolio, and pay down debt wherever possible. You would want most of your bonds & international equities in your RRSP, and since you'll need more than registered space to implement it, probably hold CDN equities in non-registered accounts. 

Building the biggest pile of money you can is one approach to personal finances. Another is figuring out what you need (or want), and how to get there with the 'best' combination of risk and effort. It definitely sounds like your thinking has been in the first category up to now.


----------



## doctrine (Sep 30, 2011)

For the amount of money you're working with, seeking some fee-based advice may work.

However, keep pursuing the self-knowledge path. Investing is not that hard, although there is a learning curve. But once you start investing with your own actual dollars, you'll learn fast. But in your case, you may not want to jump with two feet in right away, it may make sense to dip your toes a little first.


----------



## jcgd (Oct 30, 2011)

That's very interesting about your job vs your personal wealth management. Good on you for wanton to learn more. 

I can't advise you towards anyone, Moneygal on the forum is who I would ask. She seems knowledgable in personal finance planning and would be someone I would trust, at least for a reference. I'm too young and have no need for a planner quite yet. My income is average and I believe my knowledge is rather advanced versus my peers so I will wait until I actually have some assets to manage before I pay for an advisor. I will get myself a good adviser along with an accountant and lawyer when the cost is justifiable. 

For someone in your circumstance the chance of becoming wealthy is much higher than someone like me in sheer earnings potential alone. Some quality advice would be a drop in the bucket, so that would be my course of action. It might be smart to be risk adverse in your situation but that is a personal thing. If the chances of becoming wealthy from one's job alone were high they may be much more concerned about keeping the money than growing it. 

I would personally try to make more money, but I find it fun. Some people are in it for other reasons. Time to do some soul searching.


----------



## Afp (Mar 19, 2013)

mikescool said:


> I am very interested in learning how to DIY and i have been reading up on it for the past month or so. But i think you are right, at this point it would not hurt to get a fee based advisor to create a professional plan while i figure out the nuances of DIY investing
> 
> any recommendations on those?
> 
> PS. I work in Private Equity, so on good years you make alot, but when there's no deals then it's all downhill haha. Kinda of funny how i work in the finance industry yet know so little about personal wealthy management. Maybe i was too concentrated on trying to spend the money i made instead of investing it properly! i'm also trying to change this habit as well. very very bad habit to get into haha


Mikescool,

If you don't know where to start, Frugal Trader's Smith Manoeuvre portfolio is a great reference. I have learned a lot from his blog and this forum. I have been reading this site very often but never posted anything until I came across your thread because few years ago, I was in the same situation as you are today.
http://www.milliondollarjourney.com/smith-manoeuvre-portfolio-february-2013.htm

Smith Manoeuvre works best with high income earner like you. You will simply make your non tax deductible expense to be deductible by swapping the HELOC interest with dividend income. The HELOC is tax deductible against your income at highest rate. Meanwhile, the dividend income after applying gross up dividend tax credit will be taxed at much lower rate. 

The gross up dividend rate for tax year 2012 is 38%. You can find out more about it at: http://www.cra-arc.gc.ca/E/pub/tg/t4015/t4015-12e.pdf. The dividend tax credit for Ontario at the moment is: 6.4% http://www.fin.gov.on.ca/en/credit/dtc/index.html

Basically, you don't necessarily have to use this dividend income to top up your mortgage. As long as the income is coming from your stock dividend/interest, you can use it for daily expenses, clothing or even vacation and the money is still tax deductible at your highest earning tax rate. Isn't it nice?

My thanks to CanadianCapitalist, FrugalTrader, MoneyGal, Toronto.gal, Ethan, gobor, Eder, PMREdmonton, Homerhomer, Eclectic12, none, HaroldCrump and many..., I have learned so much from you guys.


----------

