Canada Bank Rate History 1956-2006

Since the prime bank rate is such a key factor in many financial decisions, I found a history on the web and graphed the January Rate. The average prime rate over the 50 years from 1956 to 2006 was 7.58 %. The extreme range was a low of 3.5 % in 1956 and a high of 20.0 % in 1981. The highest stretch of rates was the seven (7) year period from 1979 to 1985 when the rate never went below 10.5 %. Talk about 7 years of bad luck!

Keep in mind that these are prime rates and fixed rate mortgages are always higher.

Smith Manoeuvre Review...September 2, 2007

I'm still reading the book and reviewing some comments on other blogs. It took me awhile to understand the basics. Not because I am older, and not because I am new to this kind of financial stuff, my resistance goes much deeper. It is contrary to my basic emotional programming. I guess I also thought that this sounds too good to be true.

I must admit that I am still trying to "get use to the idea". It makes a lot of sense logically and mathematically but like most everyone else I have been brain-washed with the working-class belief that debt is bad and that we should run away from it as fast as we can. Our beliefs come from our parents, friends, relatives, books and the media. Were all driven by fear. When I read other posts on the SM I know I am not alone on this issue.

Smith makes some excellent points beyond just using leveraging. That when it comes to investing in things that go up in value such as equities or real estate, "time is our friend". That is not a new concept, I have "know it" for many years. But Smith has found a way around the "big rock" in the stream, he shows us a way that we can overcome an imaginary obstacle, like the migrating salmon, we can jump over it. He gives us a solution that we never had before. It is positively brilliant.

It then follows that to wait "to invest", until the mortgage is paid off is not the best course of action. It is a "missed opportunity".

The reality of it all is that in order to become financially independent and retire at an early age, we need to own our own home and own other investments as well.

The SM is much more than just leveraging to buy investments. Smith also demonstrates the benefits of selling current investments like CSBs, Term Deposits or equities, using that money to pay down the mortgage, then borrow it back to re-invest. Many of us have a mortgage and money invested in other things at the same time. I was in that position for a couple of decades.

By simply re-arranging our financial house to take advantage of the tax benefit, we can keep our total debt the same, own all the same stuff, and get a big tax refund on top of it all. The tax refund can be used to pay off the mortgage sooner or to buy more investments. One's dollar level of debt never goes higher than the original size of the mortgage. And, with inflation, that debt actually reduces over time. A debt of $100,000 today is really less than a debt of $100,000 ten years ago. So one's debt level and amount of leverage actually reduces over time using the SM.

What about our fears...what if a bear market occurs? What if interest rates rise? These are excellent questions and I think one needs to go into the SM with eyes wide open and with "an emergency plan". Having an emergency plan reduces stress.

I don't know if my emergency plan ideas for the SM are the best ones, but here are a few initial thoughts.

Emergency Plan Ideas
If interest rates go crazy, like they did back in the early 1980s - and mortgages go above 20 percent, what can one do with leveraged investments? I can think of several options.


Owning equity investments, in addition to one's home, is not the same thing as owning a more expensive house. You can't sell half of your home quickly, easily or conveniently. In comparison, with the SM you have more control. Equity investments can be easily sold to reduce the amount of leverage.



Using the SM one owns the equity investments free and clear. They are not "bought on margin"(the old scary method) so you will never see a margin call that forces you to sell anything during a market crash. You won't be tempted to jump off a 10 storey building. You will therefore always have total control on the degree to which you are leveraged.





When and if it happens, you will have to weigh the pros and cons of selling equities and losing the tax refund. Higher interest rates will also bring higher tax refunds to your door to mitigate the situation. It may come down to whether or not one can meet higher monthly payments. Keep in mind that interest rates don't go from 6% to 20% overnight. You will have some time to consider your options.


During a long bear market one could sell some equities in the SM leveraged portfolio and replace them with interest paying things like Term Deposits, GICs or CSBs. During periods of high mortgage rates, these things would also be paying much higher interest rates. I can recall getting in-the-order of 18% on term deposits back when mortgage rates went above 20 %.

Another option may be to lock into a fixed interest rate loan for the investment account.

Smith also discusses the option of capitalizing interest. CI means borrowing more to pay the interest. Doing some of this would also be a way to control monthly payments.

The Smith Manoeuvre Review...September 1, 2007

I'm currently reading "The Smith Manoeuvre" by Fraser Smith, 2002. ISBN 1-55369-641-7.

So far I'm finding the book quite good and easy to understand. It is a quick and easy read if you don't stop to check the math. Theoretically, in hindsight, had I discovered the SM back in the mid 1980s, when the author first invented it, and had I implemented it on my mortgage, and had I understood the market, as much as I do today... back then... then I would be a lot richer than I am now. Hindsight is 20/20 and there are a lot of "ifs" in this statement!

One of my initial concerns was that the SM required one to take on additional debt. This doesn't seem to be the case. As I understand it, for the Plain Jane version, one's total debt never exceeds the initial amount of the mortgage for the life of the mortgage. That is less scary than taking on a mortgage plus additional debt for investments.

I also like the fact, that for young people, the investments grow slowly over time, giving one time to adjust to the reality of market volatility. It forces one to "dollar cost average" into the market. Even if one understands very little about the market, dollar cost averaging builds in a safety factor against really dumb moves. But be very careful here....dollar cost averaging alone is not enough to save one from big stock market mistakes.

The SM depends upon using financial leverage to help one grow their net worth over time. However, financial leverage can also make a bad move much worse. In general, the SM alone does not guarantee success and it could make things much worse.

When applying the SM one should have a solid understanding of how the stock market works and the historical pitfalls. "The Four Pillars..." book is a good primer on this issue. In particular, learn about the historical mistakes that keep repeating themselves with each generation. Each and every time market participants think "this time is different".

A worse case scenario for the SM would be where one invests a very large "lump sum" into the market, in the wrong (high risk) investments, at the worst possible point in time. This could happen with a mature SM account, where the owner gets caught up in a buying mania, sells and buys a large sum of investments within the portfolio, or where one begins the SM with a large lump sum borrowed on a home that had been owned free and clear before the SM.

For example, if an investor (gambler) made a lump sum purchase of dot.com stocks such as Nortel (NT)or Cisco (CSCO) or even the entire Nasdaq Index near the peak of ~5000 in late 1999 or early 2000. This was a classic case of "irrational exuberance" when many people treated the market like a gambling casino. Then, during the subsequent severe bear market, the investor/gambler "lost heart", gave up on the "buy and hold" philosophy because the pain was too great, and sold it all at a large loss. That loss would then be in the form of debt, debt that the investor/gambler must pay interest on until it is paid off.

One redeeming fact is that the interest on that debt is all income tax deductible. Also, if the SM had been in place for a number of years with significant profits accumulated, prior to the dumb mistake, these profits would help offset the big error.

Home Ownership Versus Renting

When it comes to the debate about whether to buy a home or rent, there are several benefits of owning your home, benefits that don't easily fit into a spreadsheet comparing homeownership with renting.

First, you can lend money, at mortgage rates, for investment purposes. This is a lower rate than other loan types. This makes the Smith Manueovre more attractive.

Second, you are "more secure" in a home because, if I recall correctly, under Canadian law you can't be evicted/foreclosed on until you miss three consecutive mortgage payments. People who own real estate have a higher status under the law.

Third, from an investment viewpoint, a principle residence is not subject to capital gains. You get to keep all the profits.

Virginia Tech Shootings

We are hearing about how fault finding is going on with the school.

I think a reasonable solution to the school shooting events of the last decade or so would be prevention. How can it be prevented?

First, all schools should have a "zero tolerance" policy on bullying. By this I mean, no verbal abuse or gestures are allowed. I expect most physical violence between students is preceded first by verbal abuse or unwelcome comments, sentiments expressed by gestures, strange clothing etc. This would include written comments etc on school property or books covers etc.

Second, all schools should have a respectful school policy. For example, a dress code guideline to prevent some students from expressing their rebellion against others through extreme cloths such as long black trench codes. School uniforms are not necessary just general guidelines, with a provision for special case decisions as creative students try to get around the rules. Just tell them they can dress any way they like when they are out of school. Anything that can be interpreted as being disrespectful towards fellow students or teachers must not be tolerated.

Third, extreme cases should be reported to the police. That's their job.

The parents should be asked to vote on these rules to gain their support so it is not "just the school authority".

TSX Going Below 12500...Aug 29th Observations

I don't use an alarm clock anymore since retirement unless we have something special going on. The sounds of the west coast were the first things I heard this morning. The first was the sound of the nearby fog horn at the light house. There must have been fog out on the Straight of Georgia this morning. The second sound I heard was the squawking of a Raven flying over the house.

I checked the stock price charts for RY (Royal Bank) , K (Kinross Gold) and PCA (Petro Canada) just now... well known examples of the Canadian in the banking and resource sectors. All three appear consistent with my impression of the TSX Comp index going lower. These three stocks all look like they will go below their lows of mid August 2007. All three have made recent rallies, since mid August lows, on decreasing volume.

BMO (Bank of Montreal) may have started its drop. Now at $65, I expect BMO to go below the mid-Aug low of $59 (-10% from today's price). BMO news out about large trading losses. The company fundamentals seem to agree with the chart. Another red flag.

If I was a gutsy gambler I would short BMO stock at this time. Selling short is an interesting experience. You sell the stock first, then buy it back later at a lower price (if your successful). It is still buy low and sell high. Unlike buying Put options there is no time limit to run out on your trade. If I owned a lot of BMO shares I could sell covered Put Options at this time. But I digress.

These individual stock charts are suggesting the same thing I see in the chart for the S&P TSX Comp Index. If my prediction is correct, this is the way it should be. When possible, it is always wise to look at something from at least two different viewpoints. If it walks like a duck, looks like a duck and sounds like a duck...it probably is a duck.

Average Retirement Age 61.5 Years Old

There are a number of news articles out there today based on a recent Stats Canada report(s).

Statistics Canada has recently reported that "the average age of retirement remained steady at 61.5" according to this on-line article.

Most baby-boomers are not seeing "freedom 55". Having retired myself just a few months after my 55th birthday I can understand why. It requires a lot of discipline to save more and spend less while everyone around you is spending their extra cash on winter vacations, larger homes and newer cars. Then there are all those who just need to continue working due to their low wage level.

Statscan also found that about one third of older boomers are taking their Canada Pension Plan money at age 60 but continuing to work. The majority are women.

The CPP has investments worth about $120 billion, with about 65 % of this money in equities. This money is one of the many sources that help guarantee that the TSX Comp Index "will always come back" after a correction, like the current one.