TheStar.com - Sit back and watch your money grow
TheStar.com - Sit back and watch your money grow
Sit back and watch your money grow
PORTFOLIO DOCTORS | Eric Kirzner's Easy Chair strategy consistently outperforms the high-paid, high-profile financial experts, write David Cruise and Alison Griffiths
Jan. 29, 2006. 01:00 AM
--------------------------------------------------------------------------------
Glancing at the batting averages of many of the world's most famous market gurus leads one to the conclusion that most of them should be sent to the minors.
Smart Money magazine surveyed some of the top pundits, including Goldman, Sachs & Co.'s Abby Joseph Cohen, a "visionary" according to her official bio, Elaine Garzarelli (who predicted the 1987 market crash), Ed Yardeni, chief global economist at Deutsche Bank Securities and Bill Gross founder of PIMCO, the world's largest fixed income manager.
None of them came close to batting even .300 in their market predictions between 1997 and 2002.
Bill Gross was the leader, being right two times out of eight tries, or a batting average of .250, adequate for a light-hitting, good-glove utility infielder but hardly what you're looking for to guide your investment picks.
On the other hand, there is Eric Kirzner. Back in 1997 the professor of finance at the University of Toronto predicted that a modest, little imaginary portfolio he created for us in April that year would return about 8 per cent over time, on an annual compounded basis (meaning all dividends and interest income is reinvested). And he was 100 per cent right.
As of Dec. 31, 2005, the Easy Chair portfolio has returned 8.15 per cent with its basic and conservative asset allocation of 20 per cent cash (money market fund), 30 per cent bonds (Government of Canada December, 2006), 35 per cent Canadian equity (i60 exchange-traded fund) and 15 per cent U.S. equity (SPDRs, Standard and Poor's Depositary Receipts.)
"I picked an asset allocation that is classic," notes Kirzner. "It is a balanced portfolio and quite defensive. Twenty per cent in cash is quite high but if I was anticipating the year 2000 crash I would have gone 100 per cent in cash!"
Actually, Kirzner is joking. The whole point of passive investing generally, and the Easy Chair in particular, is that the strategy eliminates guessing.
"It means you are not paying for the search for undervalued securities and not trying to time changes in the market — when it is going to be strong, when it is going to be weak."
Still not convinced that investing, then sitting back and doing nothing, is the way to go? Just take another gander at the first paragraph and see how often the highly paid, well-informed stars of the market were right in their predictions.
Last week we discussed the portfolio's performance and Kirzner's rationale for this passive investment experiment nearly nine years ago. You can read that article on our website http://www.portfoliodoctor.ca.
One of the secrets of passive investing lies in rebalancing. Though Kirzner only rebalanced back to his original asset allocation seven times in eight and a half years, the exercise allowed him to sell back the equity portions during their rise in 1999 and early 2000 and prevented the portfolio from being sideswiped in late 2000 when the bottom fell out of the market.
At the end of October, before rebalancing, the Easy Chair looked like this:
16.7 per cent cash,
23 per cent bonds,
44.6 per cent Canadian equity and,
9.3 per cent U.S. equity.
The remaining 6.4 per cent sat in interest and dividend payments accrued since Kirzner rebalanced it last in late 2004. The cash, the bonds and the U.S. equity portion were all down from their original allocations of 20, 30 and 15 per cent respectively. That was thanks, in large part, to the big jump in Canadian equity after the stellar year enjoyed by the TSX.
Rebalancing should be a fairly automatic event, guided by one's chosen asset allocation. If you picked 10 per cent cash, that's what you rebalance back to.
But costs play a factor also. One of the strengths of this portfolio lies in how inexpensive it is to manage. Not wanting to jeopardize that, Kirzner chose to keep his equity positions as they are.
"The cost of additional rebalancing was not worth restoring the precise target. I used cash (the accrued interest and dividends) to buy more of the money market fund and restore the 20 per cent base."
Kirzner also shored up his fixed-income position by purchasing XBBs — the exchange traded fund or iUnit that simply tracks the Scotia Capital Universe Bond Index (which comprises short-, mid- and long-term investment grade bonds).
This ETF is listed on the TSX under the ticker XBB. When the Easy Chair was first created, such a product didn't exist and the only options for bond purchasers were buying retail bonds, which are expensive in small quantities, or a bond fund, few of which qualify as passive as the managers are trading bonds constantly.
After rebalancing the Easy Chair now looks like this:
20 per cent cash,
26.2 per cent bonds (23 per cent original bond purchase, 3.2 per cent XBBs),
44.5 per cent Canadian equity and,
9.3 per cent U.S.equity.
If the pundits are wrong and oil doesn't hit $100 a barrel, gold swoons and the TSX plummets, Kirzner's next rebalancing may have him selling some cash, bonds or U.S. equity in order to restore his desired 35 per cent Canadian equity.
On the other hand, if the TSX continues to roar and the allocation starts pushing beyond 45 per cent, then Kirzner may decide the costs of selling the i-Units are well worth it.
Allowing an asset class to become too overweighted invites disaster à la Nortel, when so many investors who had doubled or tripled their money were caught in the stock's landslide. Why? Because they neglected to rebalance their portfolios.
The Easy Chair is an admirable candidate as a core portfolio. One might, for example, invest 75 per cent of assets in it for peace of mind, then diversify into other geographical sectors, such as Europe or the Far East or into other sectors such as biotech or a hedge-fund investment.
The key to success here is to establish an asset allocation for the additional investments and then stick to it like glue. This discipline is a defensive strategy and a guideline for all of us who love to buy but hate to sell, especially when an investment is doing well.
We'll be discussing the foundations of the Easy Chair in our new, upcoming House Calls seminars sponsored by the Toronto Star and the non-profit Investor Education Fund (http://www.investorED.ca). And we'll be showing you how to avoid some common investor blunders while developing some strategies to improve your portfolio's performance and make it easier to maintain.
We have four dates available: Feb. 15 at the Toronto Reference Library; Feb. 16 at the Milton Seniors Centre; Feb. 21 at Mississauga Central Library; and Feb. 23 at North York Central Library.
Admission is $10 per person and the proceeds go to The Toronto Star Fresh Air Fund. We are filling up fast so get your tickets quickly. You can register by phone with a credit card at 905-299-8386 or go to our website, http://www.portfoliodoctor.ca, print the registration form and mail in a cheque.
Sit back and watch your money grow
PORTFOLIO DOCTORS | Eric Kirzner's Easy Chair strategy consistently outperforms the high-paid, high-profile financial experts, write David Cruise and Alison Griffiths
Jan. 29, 2006. 01:00 AM
--------------------------------------------------------------------------------
Glancing at the batting averages of many of the world's most famous market gurus leads one to the conclusion that most of them should be sent to the minors.
Smart Money magazine surveyed some of the top pundits, including Goldman, Sachs & Co.'s Abby Joseph Cohen, a "visionary" according to her official bio, Elaine Garzarelli (who predicted the 1987 market crash), Ed Yardeni, chief global economist at Deutsche Bank Securities and Bill Gross founder of PIMCO, the world's largest fixed income manager.
None of them came close to batting even .300 in their market predictions between 1997 and 2002.
Bill Gross was the leader, being right two times out of eight tries, or a batting average of .250, adequate for a light-hitting, good-glove utility infielder but hardly what you're looking for to guide your investment picks.
On the other hand, there is Eric Kirzner. Back in 1997 the professor of finance at the University of Toronto predicted that a modest, little imaginary portfolio he created for us in April that year would return about 8 per cent over time, on an annual compounded basis (meaning all dividends and interest income is reinvested). And he was 100 per cent right.
As of Dec. 31, 2005, the Easy Chair portfolio has returned 8.15 per cent with its basic and conservative asset allocation of 20 per cent cash (money market fund), 30 per cent bonds (Government of Canada December, 2006), 35 per cent Canadian equity (i60 exchange-traded fund) and 15 per cent U.S. equity (SPDRs, Standard and Poor's Depositary Receipts.)
"I picked an asset allocation that is classic," notes Kirzner. "It is a balanced portfolio and quite defensive. Twenty per cent in cash is quite high but if I was anticipating the year 2000 crash I would have gone 100 per cent in cash!"
Actually, Kirzner is joking. The whole point of passive investing generally, and the Easy Chair in particular, is that the strategy eliminates guessing.
"It means you are not paying for the search for undervalued securities and not trying to time changes in the market — when it is going to be strong, when it is going to be weak."
Still not convinced that investing, then sitting back and doing nothing, is the way to go? Just take another gander at the first paragraph and see how often the highly paid, well-informed stars of the market were right in their predictions.
Last week we discussed the portfolio's performance and Kirzner's rationale for this passive investment experiment nearly nine years ago. You can read that article on our website http://www.portfoliodoctor.ca.
One of the secrets of passive investing lies in rebalancing. Though Kirzner only rebalanced back to his original asset allocation seven times in eight and a half years, the exercise allowed him to sell back the equity portions during their rise in 1999 and early 2000 and prevented the portfolio from being sideswiped in late 2000 when the bottom fell out of the market.
At the end of October, before rebalancing, the Easy Chair looked like this:
16.7 per cent cash,
23 per cent bonds,
44.6 per cent Canadian equity and,
9.3 per cent U.S. equity.
The remaining 6.4 per cent sat in interest and dividend payments accrued since Kirzner rebalanced it last in late 2004. The cash, the bonds and the U.S. equity portion were all down from their original allocations of 20, 30 and 15 per cent respectively. That was thanks, in large part, to the big jump in Canadian equity after the stellar year enjoyed by the TSX.
Rebalancing should be a fairly automatic event, guided by one's chosen asset allocation. If you picked 10 per cent cash, that's what you rebalance back to.
But costs play a factor also. One of the strengths of this portfolio lies in how inexpensive it is to manage. Not wanting to jeopardize that, Kirzner chose to keep his equity positions as they are.
"The cost of additional rebalancing was not worth restoring the precise target. I used cash (the accrued interest and dividends) to buy more of the money market fund and restore the 20 per cent base."
Kirzner also shored up his fixed-income position by purchasing XBBs — the exchange traded fund or iUnit that simply tracks the Scotia Capital Universe Bond Index (which comprises short-, mid- and long-term investment grade bonds).
This ETF is listed on the TSX under the ticker XBB. When the Easy Chair was first created, such a product didn't exist and the only options for bond purchasers were buying retail bonds, which are expensive in small quantities, or a bond fund, few of which qualify as passive as the managers are trading bonds constantly.
After rebalancing the Easy Chair now looks like this:
20 per cent cash,
26.2 per cent bonds (23 per cent original bond purchase, 3.2 per cent XBBs),
44.5 per cent Canadian equity and,
9.3 per cent U.S.equity.
If the pundits are wrong and oil doesn't hit $100 a barrel, gold swoons and the TSX plummets, Kirzner's next rebalancing may have him selling some cash, bonds or U.S. equity in order to restore his desired 35 per cent Canadian equity.
On the other hand, if the TSX continues to roar and the allocation starts pushing beyond 45 per cent, then Kirzner may decide the costs of selling the i-Units are well worth it.
Allowing an asset class to become too overweighted invites disaster à la Nortel, when so many investors who had doubled or tripled their money were caught in the stock's landslide. Why? Because they neglected to rebalance their portfolios.
The Easy Chair is an admirable candidate as a core portfolio. One might, for example, invest 75 per cent of assets in it for peace of mind, then diversify into other geographical sectors, such as Europe or the Far East or into other sectors such as biotech or a hedge-fund investment.
The key to success here is to establish an asset allocation for the additional investments and then stick to it like glue. This discipline is a defensive strategy and a guideline for all of us who love to buy but hate to sell, especially when an investment is doing well.
We'll be discussing the foundations of the Easy Chair in our new, upcoming House Calls seminars sponsored by the Toronto Star and the non-profit Investor Education Fund (http://www.investorED.ca). And we'll be showing you how to avoid some common investor blunders while developing some strategies to improve your portfolio's performance and make it easier to maintain.
We have four dates available: Feb. 15 at the Toronto Reference Library; Feb. 16 at the Milton Seniors Centre; Feb. 21 at Mississauga Central Library; and Feb. 23 at North York Central Library.
Admission is $10 per person and the proceeds go to The Toronto Star Fresh Air Fund. We are filling up fast so get your tickets quickly. You can register by phone with a credit card at 905-299-8386 or go to our website, http://www.portfoliodoctor.ca, print the registration form and mail in a cheque.
posted by financeblog at
1/29/2006 10:59:00 PM
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