Before the ETF explosion, there was Eric Kirzner's easy chair

If you were a small investor back in the 1980s, chances are your investment choices were limited to a few mutual funds that charged high fees and generally underperformed the market benchmarks. But that changed in the 1990s, and for that you might want to thank Eric Kirzner, finance professor at the University of Toronto’s Rotman School of Management and one of this country’s foremost experts on investing. More than 30 years ago he created a simple passive investing strategy that predated the exchange-traded fund market with a way you could put your portfolio on autopilot and earn returns that matched the returns of the broader stock and bond markets with minimal cost.

For many Canadians, Kirzner, now 73, is thought of as the grandfather of “Couch Potato” investing, or as Kirzner refers to it, the “Easy Chair”— defined as that comfortable spot where investors like to sit and stay put for many years while the good returns roll in.

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It started simply enough. After doing some related work in indexing in the early 1990s, Kirzner was asked to compete in a 1997 stock picking contest with a few other pros at the Toronto Star. “We were given a virtual $50,000,” remembers Kirzner, who initially turned down the offer because he knew that if he changed his mind about a stock pick, he couldn’t assume that the Star would publish his new recommendation in a timely matter. “Newspapers weren’t set up that way,” remembers Kirzner.

But Kirzner had an idea and he rang the Star up and offered to compete with a passive asset allocation portfolio. “I thought it would be a good way for readers to learn about focusing on portfolio mix and to see how index investing is done,” says Kirzner, who went up against four other investment pros. And that’s where the Easy Chair portfolio was born.

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At the time, the simple strategy used a money market fund, government bonds, the TIPS-35 ETF representing Canadian blue chip stocks, as well as a U.S. Spider ETF to mirror the S&P 500 in the U.S. The allocation called for 20% in cash in a money market fund, 30% in fixed income through a Government of Canada Bond, 35% in the TIPS 35 and 15% in U.S. equities.

“The basic idea was to pick an asset allocation and stay with it, thus controlling your emotions, keeping investments costs really low and letting the magic of compounding take hold,” explains Kirzner.

Years of investing research and study had brought Kirzner to that moment. After completing his undergrad in political science at the University of Toronto, he notes how his interest in investing was initially sparked when he read Canadian born economist John Kenneth Galbraith’s The Great Crash. Kirzner says he found the whole issue of markets and stock prices and what causes booms and busts fascinating.

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But it wasn’t until 1968 when Kirzner started to really develop his interest in both investment finance theory and applications. He read Morty Shulman’s, Anyone can make a million, Edward Thorp’s Beat the Market by Edward Thorp as well as “the brilliant Money Game” by Adam Smith before taking his MBA in finance.

Fast forward a few years and we see that the boring little Easy Chair portfolio came through the tech bubble and 2008 market meltdown well ahead and maintained its steady returns record. “So, from 1997 on, I hardly ever traded, I simply rebalanced the portfolio—what I call the Rip Van Winkle or Easy Chair approach to investing,” says Kirzner. At last count, the portfolio is returning a little over 7.5% annually, compounded with dividends and interest reinvested.

With the advent of exchange-traded funds (ETFs) what would that simple Easy Chair portfolio look like today? Well, a little more complex. Kirzner has made some changes to his original 1997 model, including dropping money market funds from the mix, recommending instead that 10% of your portfolio be kept in cash in a high-interest savings account. He says another 35% should be put in fixed income in a mix of various short-term duration bond ETFs, 15% in Canadian equity using an ETF such as the BlackRock XIU, 10% U.S. equity using a product such as the SPY, 15% global equity using a fund such as XIN, 10% in emerging market equity using a product such as VEE and 5% in an innovative tech ETF.

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“Nowadays, there’s an ETF for almost any index you want by sector, by country, by capitalization size, by style, and so forth,” notes Kirzner. “The challenge is selecting from a choice of investment products within each category distinguished by portfolio composition, governance, cost and other factors.”

You’d think that as the grandfather of the Easy Chair strategy, Kirzner would shun active investing, but that’s not the case. “I myself have always used an indexed foundation or core to my portfolio and then picked individual stocks and other securities—sometimes called core and explore,” says Kirzner. “But make sure that the active portion is really adding value over time.”

Even today, with all of the investment worlds complexities, Kirzner believes passive investing is here to stay. “You cannot be saved in the equity portion of your portfolio in a prolonged market downturn although some active managers might do much better,” says Kirzner.

“The key is that if you have the right asset allocation you limit your downside through the level of exposure to the safer sectors. And the growth of the robo-advisors [Kirzner is an advisor to Canadian robo-advisor firm Wealthsimple] and that underscores the growing but still modest popularity of indexing.”

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Right now, Kirzner is still investing a portion of his portfolio (the “explore” portion) in securities not found in major indexes, though he says he’s definitely not a dividend seeker. He focuses on long-term wealth builders with some investments in technology stocks, China and Blockchain data companies. “If not individual companies, then I buy ETFs in that area. Occasionally I find a company that has good growth prospects but I mainly play to my strengths and that’s asset allocation.”

As for the future, Kirzner hopes the wealth he is building in his Easy Chair will help preserve his lifestyle in retirement, allow him to make some philanthropic gifts as well, and also help him make some gifts to his kids and grandkids. “They’re pretty smart so I want to help out when they get into Harvard or Yale,” he laughs. “The important thing is not to think of investing as simply a game. That’s dangerous.”

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At this stage in his life, Kirzner has taken Santa Clara University behavioural finance expert Meir Statman’s financial planning strategy to heart. For Statman, financial planning is even more important than investment planning and he has developed a long-term plan with that in mind.

“According to Statman, you should always be thinking of your portfolio as truncated into four portions,” says Kirzner. “The first portion should guarantee you’re never poor. The second portion should be used to maintain your lifestyle. The third portion should be used to enhance your lifestyle and the fourth should be a portion given to future generations.” Good advice.