After few recent posts on Blossom on smith manoeuvre process or borrow to invest through PLOC (specially the recent post from @moementumfinance) I started looking into in and done some reading. Now I would like to dip my toe in PLOC or Margin Account. I dont have access to implement SM right now atleast next 3years as I am already in the mid of my mortgage term. So the closest I have access to PLOC or Margin. I am thinking to start very slow and little. I can think of below 2 approaches. But not sure which one to consider. Let me right down few parameters. I am keeping some number random for illustration only. Loan Amount:10000 Borrowing Rate:4% Marginal Tax Rate: 28-35% Year: min 10 Option 1: Invest in $ZEQT Either from PLOC or Margin Account Pay Back interest manually Turn On DRIP Option 2: Invest in $ZEQT-T Margin Account Turn OFF DRIP So Pay off Interest (4%) + 2% from Actual Loan automatically as Distributions from $ZEQT-T is almost 6% Now with 1 i will get the taste of DRIP and compounding interest over the time. Will pay off loan at the end and utilize capital gains. With option 2 as long as loan interest is less than 6% and Distributions is 6%. There is no manual intervention needed and it will auto pay interest+ principal. The downside is over the time tax benefit will reduce as total interest will reduce after paying principal. After 10 years I can keep it rolling or payoff the loan anytime during or after the tenure. But will lose biggest benefit of DRIP compounding. Any other drawback you are seeing on one option than other? Or anyother option combinations which have more benefits. Would like to hear back from @moementumfinance@karyungtom@cjs033@riggs who have already done this and have some insight of +- side effect. PS: I am not financial advisor. This is not a financial advice. Leverage play is very risky and have side effect. Do your own research and due diligence.
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33 Comments
Angelaaaaaaaaaa @Schwa · 22d
The tax implications of ZEQT-T might not be as efficient in a non registered account. I’m not sure what the tax breakdown would be but I’m assuming it would be a mix of everything. For myself personally I’m going with a mix of CDAY, SDAY, QDAY. CDAY is a mix of Canadian Eligible Dividends and ROC. SDAY is some foreign income and ROC. QDAY is mostly ROC. Currently I’m reinvesting all the distributions I’m not really focusing on paying off the loan at this current moment. I’m also not terribly concerned about taxes. My immediate goal is to match my current employment income before starting to pay off the loan.
Mcintosh Jen@Smithaaaaa · 22d
Might talk about this more on our KarMoe show, but I love how this gets my brain juices flowing. @reachjay I think what @randomyaapping is doing is close to what I did in the past, where my focus was simply maintaining a target leverage ratio. Hence, like he said, whether he pays the margin interest directly does not really matter, provided the portfolio ideally grows faster than the margin balance. However, there does come a point where the margin portion of the strategy might become too large a percentage of the overall portfolio. I do think there is a responsible limit somewhere. I talked about this in two of my most recent posts, but Option 2 has never made sense to me personally. Because distributions are part of ZEQT-T’s total return, it would feel weird to pull them out rather than leave the full $10K invested and let it do its work. My other concern with Option 2 is what happens during down years. The distributions would continue removing money from an already-depressed investment, while most of that money might only cover the interest rather than meaningfully reduce the principal. Your investment exposure could therefore shrink faster than the loan itself. If a fixed loan amount is what I’m comfortable with, I would definitely rather use work income to pay the margin interest and keep the loan at $10K. Option 2 is more like, “Frontload equity exposure, then partially unwind that exposure to service and amortize the loan.” That is perfectly fine if it is what you want to do, but I don’t know if I would personally want declining exposure versus maintaining a more consistent leverage ratio, à la @randomyaapping. I’d love feedback from both of you on what I just typed.
Wil @Nathanaa · 21d
Thank you everyone for providing feedback. I think I will go ahead with Option 1 ie Pay off accumulated interest from work income. Turn on DRIP to gain from bigges compounding math. It really make not much sense to take out distributions when I really dont need it. Also pulling distributions everymonth now will have more tax added to it which is unnecessary at this point of my life. I totally agree with @karyungtom point that its not like mortgage payment as during mortgage payments are paid not from Heloc but from external sources(work income). Tbh i did not thought that way..
Bailey @Davidaaaaaaa · 22d
Jay I am going to do the same, an experiment with 10K I have two options 1. Wifes TFSA has plenty of room 2. My RRSP has plenty if room. Mostly CC ETFs that can beat the interest that I will be paying. If u want we can discuss our strategy. I have couple of ideas. Msg Me. Thx
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