For those of you just joining us, this is my portfolio that is leveraged with money borrowed from my home equity line of credit (HELOC). As the money borrowed is used to invest, the interest charged is tax deductible. For more details, check out my modified smith manoeuvre strategy.

It’s been a couple of months since the last update and there isn’t much good news to report back.  The portfolio has been driven down lower as the markets are still making new lows.  Even though there are a good few equities that may be considered “cheap”, I’m nervous about deploying new capital in this market as the bears have clear control.

Despite this though, I did dabble a bit.  So what did I buy?  Only one purchase, 30 shares of Scotia Bank (BNS).  Seems though that lately whenever I buy something, it goes down further!

If you compare to last month, you may notice that the portfolio dividend yield has been reduced a bit.  The reason is that Husky Energy has decided to reduce their dividend during this period of reduced oil prices.   There is some speculation that the banks may potentially reduce their dividend as well which would put a damper on my dividend goals.  I’m going to keep my fingers crossed that the banks pull through this financial mess without touching their dividend payout.

Here is my SM portfolio as of Feb 2009:

Stock Symbol Shares Avg Buy Price Total Div/Share Yield
Royal Bank RY.T 75 $47.62 $3,571.25 $2 4.20%
CIBC CM.T 45 $67.14 $3,021.25 $3.48 5.18%
Power Financial PWF.T 105 $35.14 $3,689.65 $1.40 3.98%
Scotia Bank BNS.T 105 $41.91 $4,400.52 $1.96 4.68%
Manulife Financial MFC.T 125 $33.12 $4,139.48 $1.04 3.14%
Fortis Properties FTS.T 100 $26.69 $2,669.49 $1.04 3.90%
TransCanada Corp TRP.T 50 $36.87 $1,843.25 $1.52 4.12%
FTSE RAFI US 1500 Small-Mid ETF PRFZ.US 20 $51.50 $1,029.99 $0.42 0.82%
AGF Management Limited AGF.B.T 50 $22.71 $1,135.49 $1.00 4.40%
Bank of Montreal BMO.T 25 $44.17 $1,104.24 $2.80 6.34%
Husky Energy HSE.T 85 $35.90 $3,051.28 $1.20 3.34%
Petro Canada PCA.T 50 $30.57 $1,528.49 $0.79 2.58%
Teck Cominco TCK.B.T 100 $15.35 $1,258.99 $0.00 0.00%
TD Bank TD.T 50 $48.29 $2,412.23 $2.44 5.06%

Total Portfolio Book Value: $50,000 (total invested from HELOC)

Portfolio Net Value: $37,345.54

Total Portfolio Cost Base of Equities (including commissions): $34,855.60

Portfolio Market Value of Equities (as of Feb 24, 2009): $20,672.10

Total Dividends / Year: $1,361.30

Portfolio Dividend Yield: 3.91%

It’s a little demotivating to see the net value of my portfolio well below the book/purchase value.  However, if we were to focus on the positive, it would be that the dividend yield is still relatively high relative to my after tax investment loan servicing costs.  In addition, I still have substantial credit available on my HELOC which is potential investment cash.

There have been a lot of readers who have mentioned that they are interested in a leveraged portfolio.  Over the long term it may be lucrative.  However, over the short term, equities are volatile and can put the portfolio deep in the red.  My portfolio is a prime example of what can happen.  If you can’t stomach losing 20-30% in the portfolio in any given year, then your risk tolerance isn’t suited for leveraged investing.


  1. DAvid on February 25, 2009 at 10:02 am

    Little brother says “Tell me what you want to short, because if I buy it , it will drop”. He’s not very happy with his portfolio performance, or his advisors pricey advice. I pulled from the market in December (not nearly early enough) and am waiting for the volatility to lessen.

    Also, I believe the bears are not in control — it’s a day trader’s game with blue chip stocks moving more than 10% in a day.


  2. QCash on February 25, 2009 at 12:13 pm


    Keep in mind that as long as you don’t need to sell, you are in a good position. The dividends will flow and the prices will bounce back.

    The good thing is you are only down about 28% compared to the markets which are down over 50% from their highs.


    As of last month, I am now completely MER free. I finally convinced my wife to dump the last three mutual funds she was holding and now all our assets are held directly. Financial advisors are good to get you started, but they don’t know any better than the rest where the market is going. Gone are the days when a broker might try to get you involved based on his “inside knowledge”. The internet and 24 hours a day business channels and afterhours trading make sure that everyone knows exactly where the prices are and why.


  3. Ray on February 25, 2009 at 12:54 pm

    MJD: please let me know next time what you are buying so that I can go short ;)……..
    I also have a small levered portfolio and before last week it was up since than its down about 17% :( my recent purchase was also BNS they only thing that is holding on for me is Rogers but since last week also been on a downhill.

  4. Ray on February 25, 2009 at 12:58 pm

    QCash: I agree that advisors down know more than anyone else about when the markets return, but they do have access to a lot of information and analyst reports which not many people do, even if they did they wouldnt always understand it or have time to understand things. They are a good emotional support system, well not all but those that actually care. Recent study by Sunlife Unretirement survey showed that those with advisors are much more confident and comfortable than those without it. I did a review of the study on today’s posting.

  5. Sampson on February 25, 2009 at 1:00 pm


    I’m in the process of trying to setup a readvanceable HELOC – but I find valuations impossible to assess. Not only are earnings predictions completely unreliable, but lots of companies seem to have all these nasty surprises lurking around.

    I wonder if you are itching to put more money into the market, or are you planning on waiting out all the volatility.

  6. Qubikal on February 25, 2009 at 1:36 pm

    Has the rates on your HELOC increased recently with all the banks jacking up their LOC rates? Mine will be shooting up 1% in April, which for the short term (until my Mortgage is renewed in 2010) becomes more expensive than the mortgage itself on an after tax basis.

    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…

  7. FrugalTrader on February 25, 2009 at 1:42 pm

    DAvid: Whoever it is that’s in control, it’s not a good thing!

    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?

  8. Finance_Addict on February 25, 2009 at 2:58 pm

    This crummy market has forced many to become “long term investors.” However, although capital gains are great…Many who use the modified smith maneuver did so for the ability to claim borrowing costs and more importantly have a steady growing stream of dividend income basically forever. Your portfolio and many others like it are still accomplishing this quite well. Even if the div yields stay flat for now the borrowing costs have come down to help compensate. I also don’t like to see market value well below book. My only concern is if or when borrowing costs start to strongly outpace dividend yield growth.

  9. wx_junkie on February 25, 2009 at 3:01 pm


    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?


  10. Dividend Growth Investor on February 25, 2009 at 3:11 pm


    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.

  11. FrugalTrader on February 25, 2009 at 3:20 pm

    Finance_Addict: If we get hyper inflation after this downturn, it will put a lot of pressure on leveraged investors.

    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.

  12. CanadianFinance on February 25, 2009 at 3:35 pm


    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?

  13. FrugalTrader on February 25, 2009 at 3:49 pm

    CanadianFinance: At the time, I thought that the fundamental ETF would provide some US exposure and diversification for the SM portfolio. In hindsight though, I would prefer that ETF within my RRSP. More on this later.

  14. DwellOn on February 25, 2009 at 5:31 pm

    I just started my leveraged HELOC investing on Friday (wish it were Monday instead!). Here’s how it looks:
    – Interest 3% (likely going to 4% soon)
    – Investments:
    $10,000 each:
    CPD Claymore Preferred Shares
    XIC – iShares CDN Composite
    XRE – iShares CDN REIT
    – Total Yield – about 7%
    – Total MER – 0.42

    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)?

  15. Maxtron on February 25, 2009 at 6:04 pm

    Hi FT, just my little grain of salt here. But if you do believe in some of the companies that you already own, why don’t you buy some more of their shares. That way, you could average down and increase your dividend yield.

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

    Good luck!

  16. Sampson on February 25, 2009 at 7:26 pm

    >In hindsight though, I would prefer that ETF within my RRSP. More on this later.

    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.

  17. TheFatLossAuthority on February 26, 2009 at 12:46 am

    Thanks for the update. I’m in a similar position with $50,000 leveraged and a worth around $36,000. I’ve been very tempted to throw another $10,000 into it but only after I max out RRSP, RESP, and start up a TFSA. Thanks again for sharing…

  18. HIghlander on February 26, 2009 at 12:56 am

    I’ve been thinking about exit strategies ever since I started my SM a couple of years ago. The SM for us was a way to finance a cottage without completely destroying our existing retirement plan and investments. I don’t want to enter retirement in 10 years (one can hope :-) with a large amount of debt, even if it is backed by securities and the real estate.

    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 :-)

  19. FrugalTrader on February 26, 2009 at 9:05 am

    Highlander, thanks for the insightful comment. I actually have a post on this topic coming up next week with very similar ideas.

  20. CanadianFinance on February 26, 2009 at 2:30 pm

    Looking forward to your update on PRFZ.US… I was also thinking RRSP or TFSA for this as it’s not a canadian dividend and the previously mentioned lower yield that wouldn’t cover the interest rate.

  21. Mark on February 26, 2009 at 10:31 pm

    Hey FT,

    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.

    Mark in Nepean

  22. Mark on February 26, 2009 at 10:39 pm

    Hey Q,

    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.


  23. FrugalTrader on February 26, 2009 at 10:54 pm

    Mark, I do like ENB and it’s on my watch list. It seems to have held up very well during this market crash. I am however, waiting for it to get cheaper before I open a position. With regards to DRIP, I do with my other accounts, but not my SM. I like having the cash on hand to either pay down the mortgage, or reinvest in stock that I find cheap at the time.

  24. Derrick on March 1, 2009 at 2:18 pm

    Great post. Added to RSS feed and soon to the blog roll!

  25. Glen on the Rock on March 1, 2009 at 3:30 pm

    I am regular reader of your site. Good job!
    I was looking over the investments in your SM portfolio and I would like to know which investments you would buy now if you were to invest in the market. It does not have to be an investment from your SM. I am looking to start my own portfolio and would like to get some ideas. I have had an investment loan with an advisor here in town for the last 14 months and I am down around 45%. I am realizing I am the best person to invest my money, not an advisor investing in mutual funds with high MER’s. I have a sum of money to invest and I am thinking about individual stocks using etrade with some ETF’s in the mix. Also, is anyone interested in starting a investment group that could meet regularly in the St.John’s area to discuss investment opportunities? Nothing formal, just a general brain stoming session over a game a pool or beer, etc…
    Thanks and regards,

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