There has been much concern over the viability of the Smith Manoeuvre or a leveraged investment strategy during this recent bear market. The main concerns are due to a couple of reasons, first, sinking equities, second, the increase of variable rates due to the credit crunch. In addition to this, one of the more popular readvanceable mortgages, The Firstline Matrix Mortgage, has stopped offering the product altogether (source: Canadian Mortgage Trends).
The truth of the matter is that leveraged investing is risky. The investment account is facing the relatively risky equity market along with building interest on the capital that supports it. The opportunity for the account to grow at an accelerated rate is great, but so is the opportunity for values to drop.
With current market conditions, it’s a gut check to see who can really take the leveraged investing heat. With the possibility of HELOC (home equity line of credit) rates, which are traditionally at prime, to increase above prime, it will make this strategy even more expensive. However, with a slow economy, the prime lending rates will most likely decrease even further, which will hopefully even out any increases. With that said, The Smith Manoeuvre strategy is still a valid option, just with one less readvanceable mortgage available along with the potential with higher HELOC rates. For those of you looking for alternative readvanceable mortgages, here are some of my other favorites.
What am I doing with my leveraged portfolio during this correction? Even with the extreme fear in the streets, I have my eye on the big picture and my long investment time line. Therefore, I’m sticking to the plan, watching my favorite dividend paying stocks and waiting to deploy some cash when they appear cheap. I’ve said this before, and I’ll say it again, these market corrections are temporary and should be viewed as an opporunity to buy cheap equities for the long term. It may take a while (even years) for the markets to bounce back, but if you buy cheap, you’ll take full advantage of the upcoming recovery.
For those of you with leveraged portfolios at this time, have you made any changes?