Is It Time For The Smith Maneuver?

Donald Trump officially made good on his promise to tariff the world this week, and stock markets responded in a massive way.

U.S. markets were especially weak. The S&P 500 fell some 7% for the week, while the NASDAQ plunged even further. Even the TSX wasn’t immune, with weak oil prices and sudden weakness in gold sending shares reeling here as well.

There’s legitimate fear here. I haven’t seen the markets freak out this much since 2020. At least back then we all were in this together, and we knew there was nothing we could do. But today’s decline is much different. People are angry, mostly because it seems self-inflicted. One poor decision sent stocks reeling.

I’m not here to question trade policy or start an argument on politics. I’m here to help you invest. I want to help everyone reading choose good stocks, maximize their dividend income, and ultimately retire wealthier. And there’s no doubt about it — putting money to work in bear markets will help investors reach those goals.

But is it time to kick that up a notch and borrow to take advantage of the short-term weakness? Here are my thoughts.

First, a primer

Let’s very quickly go over how an investor would go about borrowing to invest.

There are essentially two ways to do it. You can either dip into your margin, or get a home equity line of credit (HELOC) and then invest that into the market.

Each method has its own pros and cons.

From a margin perspective, it’s easy. Chances are most investors already have a margin account set up, and if they don’t it’s just a matter of a phone call or filling out a form to get one’s account upgraded from a cash account to a margin account. We’ll note that margin accounts for RRSPs and TFSAs don’t exist. If you want to borrow to invest in those accounts, you’ll have to get creative.

You simply dip into your margin, purchase the investments you want, and Bob’s you’re uncle. You’re in business.

However, many investors choose to go another route. Margin debt is expensive; with many brokers charging in the 7-10% range for the privilege of borrowing to invest. Interactive Brokers is the noted exception here, they’re much cheaper. And secondly, this method of borrowing to invest comes with the chance of a margin call.

Many Canadians choose a different option. Dubbed the Smith Maneuver after its inventor, Fraser Smith (alas, we’re not related), the Smith Maneuver involves an investor taking out a mortgage and using the proceeds to invest. The interest on the loan is tax deductible — provided it’s invested in a dividend-paying portfolio.

Investors generally prefer this method for two reasons. Firstly, HELOC debt is usually cheaper than margin debt — although that has slowly changed in the last few years as online brokerages have gotten more competitive. And secondly, it allows an investor to put borrowed money to work without having to worry about a margin call. That’s a big deal to some, although most generally keep leverage at a more prudent level — so they don’t have to worry.

Is now the time to do it?

I’m generally not a fan of using the Smith Maneuver, borrowing to invest, or even using options to add risk (and potential reward) to my portfolio.

I’m simply too risk adverse in my old age. Besides, once I figured out that FISE (my version of FIRE) was possible, I immediately took steps to ensure I wouldn’t screw it up. That included having a healthy cash balance at all times, and ceasing all activities that ratcheted up the risk level of my portfolio.

The fact is that nobody knows what stocks are going to do next week, next month, or even next year. I’ve fairly confident predicting they’ll head higher over the long-term, but that’s as far as I’ll go. Today could very well be a terrible time to borrow and invest the proceeds. We simply don’t know.

The fact is too many investors put capital to work based on vibes, feelings, and other very non-scientific ways to invest. I see this all the time, people tell me about huge portfolio moves they make based on nothing more than what they feel in their guts. Sometimes it works, and other times it backfires. Badly.

The result can be pretty bad if we’re just talking about an investor’s portfolio. But it can be devastating if combined with borrowed money — especially if too much is borrowed.

My solution to this is to come up with ground rules beforehand. Think about it logically when you’re not excited, angry, or generally emotional. Look at what’s happened before and the kinds of assets you’d buy with such money. Once that plan is in place, then be disciplined. Only put it in place if every condition is met.

Here’s what I used to do when in my wilder days.

Nelson’s plan

This is the part where I make sure I let y’all know this is in no way financial advice. I’m simply sharing what I have done in the past, and why it worked for me. Don’t simply copy my plan, come up with your own.

Okay, with that out of the way, here’s what I did:

1. I came up with a plan before the market went to hell

2. That plan was I would dip into my margin only once the TSX Composite fell 20% from recent highs

3. I’d start off with a 5% margin position

4. I’d then increase that to 7.5% if the TSX Composite fell an additional 5%

5. And I’d max out at a 10% margin position if the TSX fell an additional 5%, or down 30% from highs

And that’s it. I’d stop at 10% portfolio leverage.

For some of you reading, this isn’t very frisky at all. Derek Zoolander might call it “leverage for ants.” But that was as far as I was willing to go.

Say you have a seven-figure portfolio, and you borrow 10% of it to take advantage of market weakness. Suddenly, you’ve got a $100,000 loan to pay off. That’s not a small amount of money. Even with a decent salary and the dividends from such a portfolio coming in, that’s a years’ long commitment.

Yes, you can shorten that by selling stocks once they rally, but that creates two problems. First, as I’ve said approximately 56,000 times, most investors are bad at selling (me included). They’re likely to sell at the wrong time, perhaps just as the rally back up is beginning. And secondly, at least for me, the whole point of this is to get long-term positions in great stocks at a discount. Selling to repay a loan interrupts that compounding effect.

It worked in 2020

I was fortunate that in March 2020 I was sitting on a bunch of cash.

The first thing was my position in Northview Apartment REIT had been acquired. Starlight and KingSett offered $36.25 per unit in cash in February, and I sold. Northview was one of my larger positions at the time.

I was also in the private mortgage business, and I had a borrower refinance their loan around the same time. The high-interest lender (that was me) was paid out, and the borrower got a brand-new conventional mortgage from a big-six bank.

I had money to invest, and I put it to work in March as the stock market collapsed. I was like a kid in a candy store; everything was cheap. I gobbled up shares of all sorts of quality companies that were suddenly on sale.

I ran out of capital, and stocks kept dropping. And so I dipped into my margin, and got a loan to buy additional stocks.

I went aggressively into retail REITs with this fresh money. I was working in the grocery business at the time, and could see just how busy stores were. They were packed, even though we were all scared of getting COVID. As I talked to people who were there, I realized something. Lots of people were showing up because they were bored. Going to the store was an acceptable outing in a world where people couldn’t do much of anything.

Investors were worried about retail shops not paying their rent. What I saw was the exact opposite, that the anchor tenants would carry these REITs for long enough until the world got back to normal.

Plus, I locked in ~10% yields on these REITs, which really helped when it came to paying back the loan.

The bottom line

Like I said earlier, I’m not about to use leverage to invest in today’s market. It just doesn’t make sense for me at this stage in my life.

If I feel like there’s a really compelling buying opportunity, I can dip into my cash reserves. I keep 6-12 months worth of expenses in cash, a rainy day fund to protect against times just like these.

Saying that, I can understand the desire to want to put capital to work in today’s weak market. It’s extremely likely that we look back at today, five years from now, and see a glorious buying opportunity.

The key is coming up with a reasonable borrow to invest plan before you do it. Yours will likely look different than mine, and that’s a good thing. Always keep the potential downside in mind, don’t go too crazy, and when you do put that capital to work, embrace a boring portfolio of dividend-paying stocks.

One more thing

Us here at Canadian Dividend Investing aren’t freaking out about this market downturn at all.

In fact, as of the close on Friday, my portfolio is only down 2.7% for the year. That’s barely a rounding error.

And most importantly, my dividends haven’t decreased at all. In fact, many of the stocks I own have raised their dividends thus far in 2025, and most will raise their payouts by the end of the year. No matter what happens with tariffs.

That’s because we focus on solid, dividend-paying stocks with a demonstrated history of raising their dividend. These stocks tend to outperform significantly during bear markets, and still hold their own during bull markets.

It’s not sexy. In fact, it’s downright boring. But it works. And it works especially well during bear markets — just like today.

Canadian Dividend Investing specializes in these types of stocks. We help Canadian investors build dividend portfolios that stand up to bear markets, ultimately allowing our premium subscribers to maximize their dividend income, deliver solid total returns, and enjoy a prosperous retirement.

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