Posted by Tim Stobbs on June 4, 2009
Well yesterday in Part I, I touched on what is the Smith Maneuver (SM) and started looking at the prerequisites. Today I’ll continue to look at the other prerequisites of high risk tolerance, comfort with debt and long term commitment.
First off you do really need a high risk tolerance to pull this off. If the drop in 2008 kept you up at night a SM would have only added to the heartache. So be very honest with yourself. Any leveraged investing puts things up a notch since leveraging magnifies both the good and bad returns. Can you handle a large investment that is all financed with debt?
The last two prerequisites are rather entwined. A basic comfort with debt is required to spend long periods doing a SM. In some respects it is similar to your mortgage, but at the same time it is a lot different. A house you can still sell at any time, but selling in the middle of an SM can be very bad if the market just dropped on you. So going into an SM you have to be very comfortable having that debt load for a number of years. In addition you have to have the willpower to commitment yourself to this for the long term. An SM is not for those people that never finish anything.
So in summary there are a lot of risks involved with doing the SM. It can be a way to build up your net worth, but it can also be a way to lose some of your net worth. It’s a matter of balancing the risks in your life and deciding what works best for you.
In my personally case I might be able to pull it off. I’m not sure if I could handle carrying a debt for that long. I don’t mind borrowing money to invest in the short term, but doing it for years feels different to me and I’m not sure I would handle it well.
So how about you? Could you do an SM or have you? For those who have, please share your thoughts on it.