The difference between active and passive managed funds

There always will be a debate whether an active managed fund is better than a passive or non managed fund. A non managed fund, like Barclays iUnits exchange traded funds, are funds in which the stocks and titles which constitute it are not sold on under performance. ETF's follow the indices of the stock market. An active managed fund, like Jarislowsky's funds generally perform above the indicies and actively sell and buy stocks and titles which are included in the fund.

In these questions, the main thing is to do better than the current inflation rate, which is at 3%. If the tsx index did 12 % last year, inflation was 3%, and the Management Expense Ratio was 0.45%, the net gain was 8.75%. If the fund is actively managed, MER are a lot more, between 2.4%-2.8%. The important thing is to do consistently better than the index. And remember past gains are not a guarantee of future gains.

I think the important thing to remember is to always think about diversification in your portfolio. This way, you can always reap the benefits of both strategies.

The Smith Manoeuvre

The Smith manoeuvre is simply a financial manoeuvre to make your mortgage tax deductible in canada. This is not a problem in the US where you can already deduct the interest on a mortgage. In canada, this is not possible. a portion of the interest can be deducted if you work from home or are self employed. Most of us end up paying our house or condo 2-3 times its actual worth. The way to do this is to use the equity built up in your home to invest in the markets, in your own business or in real estate. This loan toward an investment is tax deductible in canada. For any money you pay off on your mortgage, your reborrow this money for investment purposes and end up with what we call only good debt. good debt is debt on which the interest is tax deductible. Bad debt is where the interest is not.

The Smith manoeuvre is used to convert bad debt into good debt. For most families, the Smith manoeuvre can substantially reduce the interest payments. And using an all in one product like Manulife One, you can save even further. An all in one product combines a credit line, a mortgage, a savings account, a chequing account and a credit. The main philosophy is to save as much as possible the daily compound interest that you pay on your mortgage.

Though I would not suggest to invest the whole equity directly in the stock market, I do think that as long as the interest gained on the equity is higher than the interest on the loan (minus the deductible interest since this interest is deductible and you will get a refound from the CRA in proportion to your marginal tax rate) you are in good shape.

On the web
smithman.net

Capital protected structured notes

Its been a few years since structured financial products have been on the rise. Structured notes protect the capital that is invested for a number of years, caps the maximum interest each year. A good alternative to bonds, since canadian bonds have not been doing so well due to higher interest rates. Structures notes enable the investor to expose his portfolio to the stockmarket without too much risk. For example, one captial protected structured note from citigroup follows 8 different stock market indicies all over the world. It has compound interest capped out at 10% each year, a 2% MER at the purchase of the note, no other MER later on, and a vibrant secondary market where notes are sold 6 months to a year after purchase at 103% to 127% over stock price.

One of the negative aspects is that if the markets are negative, the interest will be negative, so clients will have to wait until the note matures before cashing in only the guaranteed capital. still, not a lot of investments guarantee capital, so this might be a nice alternative to stocks and bonds.