The smith maneuver dissected

I’ve been reading and following the smith maneuver strategy ever since I read about it on the site: milliondollarjourney. I had my suspicion at first so I followed all the debates on the pros and cons of this maneuver. In the end, it all comes down to whether or not your investment can outperform a certain percentage point or if you have enough cash flow to initiate it. So I decided to do a spreadsheet analysis to see exactly how much I am gaining or losing.

Exhibit 1 shows the loan’s principle plus interest. In the smith maneuver, I will be paying the interest with cash first and then take out a loan of the same amount. This is provided that I have enough initial cash to pay the initial interest.

Exhibit 2 shows the result if I use this loan to invest in a dividend paying stock which has a special tax rule. The lower your tax bracket, the better your tax deduction.

Exhibit 3 shows the result if I use this loan to invest in a pure capital gain stock which is 50% taxable.

Exhibit 4 simulates the path where if I were to invest just with my money (same amount as the loan interest), what I will get out of it in the same amount of time.

I am still half believing it, but since full belief requires an actual success, I am going to go ahead and try this maneuver with the new condo I bought. If you see some asian guy begging on the streets of Montreal in 3 years, you know that’s me.