How to achieve a 50% rate of return in 3 years

In my previous career as a financial advisor and developer of financial planning software, I spent over 15 years devising financial plans and advising clients on how to maximize the return on their investment while trying to minimize their taxes and any risks.   

The following simple strategy will demonstrate how an investor could achieve a return of 50% in 3 years without taking on any additional risk.

To implement this strategy we are going to use a Tax Free Savings Account (TFSA), an RRSP account and a Syndicate Mortgage.

To begin the investor would invest $25,000 into a Syndicate Mortgage project using a TFSA. Everyone is currently allowed to contribute up to $25,500 into their TFSA if they have not yet done so. The Syndicate Mortgage in this example pays an 8% fixed return over the term of 3 years, which works out to a total return 24%. In addition, at the end of the term if the project were to meet a projected profit target then an additional 12% deferred lender fee would be paid to the investor. This would bring the total return over 3 years to 36%. (24% + 12%)

 At an 8% return the Syndicate Mortgage would pay $2,000 per year in interest into the TFSA. This income is tax free to the investor and therefore each year, the investor would withdraw the $2,000 and invest it into an RRSP account (assuming that RRSP contribution room was available). If the investor was in a 40% tax bracket, he would save $800 per year in taxes or $2,400 for the 3 year term of the investment.    

Finally, at the end of the mortgage term, if the Developer achieves the profit target for the project and the additional 12% bonus interest is paid the investor would receive an additional $3,000. To maximize the investment return the investor would also withdraw these funds from the TFSA and invest it into the RRSP account. This would then produce a tax saving of $1,200. 

So let’s add it all up.

Interest income                      $ 6,000

Deferred lender fee               $ 3,000

Tax savings                            $ 3,600

Total                                       $12,600

This translates into a 50% return on your investment ($12,600 / $25,000)

Since investors in a Syndicate mortgage are registered on title and the mortgage is secured against the property an investor would not have taken any additional risk to increase their returns from 24% to 50%.

In addition, when the capital is invested into the RRSP account the investor can then reinvest the capital into another investment which would boost the overall returns even higher.

To see the calculations in detail click here or if you would like to find out how you can implement this strategy please contact me to discuss. 

VA Portfolio Update

I have just updated the Value Averaging Model Portfolio's.

There are 5 Model Portfolios to follow:

VA Growth Strategy

VA Internet Strategy

VA Market Sectors Strategy

VA Market Index Strategy

VA Small Cap Strategy

The portfolio's are all performing very well exactly as I expected, and they are meeting their annual target rate of return. 

The Internet Strategy model has performed the best out of all the models and since December 2011 has produced a annualized compound rate of return of 25.4%. Click here to see the performance in real time.

While most mutual funds managers or portfolio managers are paid to try to beat a benchmark index, we take a different approach in that we try to meet or exceed a set target rate of return consistently on an annual basis. The benchmark for the model is therefore not an index such as the S&P 500 but a fixed percentage return. This return is based on the historical long term return for that specific asset class plus inflation. For example, for Small Cap stocks it is 12% and for Technology Stocks it is 15%. If an index is beating the fund, we really don't care because eventually the index will regress to it's long term historical average.

Click here to see all the model portfolio's

I have added a recently published research study to the Valueaveraging.ca website called Performance Comparison between Dollar Cost Averaging and Value Averaging Investment Strategies and the Impacts of Investment Horizon and Target Terminal Wealth.  According to the findings, with increased length of investment horizon and/or lowered target terminal wealth, the Value Averaging (VA) investment strategy will have better performance than the Dollar Cost Averaging investment strategy.

If you have a specific stock/ETF that you would like to see how it would have performed using VA over a 5 year time frame, just send me an email request with the symbol and I will run the analysis and send you a report.