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Talking Finance

Bad driver

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 25 March 2017.

Late last year we moved house and now live about 40 kilometres away from the office. As far as commutes go, it’s not as bad as it sounds. It’s about half an hour door to door – in Sydney that would be almost like living in the same suburb as your work. It’s also highway driving almost the entire way, which gives me plenty of time each day to observe the other drivers. It has reached the point where I have started categorising drivers into general behavioural types. There’s the Go-slow-Go-fast driver – that’s the one that drives at 80km/h in a 100 zone, but when it drops to 50km/h in a town, just keep their foot glued to the accelerator and blow through at 80km/h. It’s as though they’re only comfortable driving at one speed, regardless of the actual signed limit. Either that or they’re simply not noticing that they’ve entered an urban area, which is even worse.

Another familiar face on the highway is one we all know too well – the Tailgater. Don’t you just love it when you’re stuck behind a 30-tonne truck doing 50km/h in a 100 zone, and the Tailgater roars up your behind and thinks that sitting two feet from your back bumper is somehow going to make the truck in front of you go faster? They’re either just overly helpful or incredibly short-sighted – maybe they just can’t see the truck in front of you, and if you gave them the appropriate hand-signal (the universal one for ‘hello’), they might realise their error and retreat to a safe distance? That’s what I think anyway, but it never seems to work. The other common highway driver is of course the P-plater. I don’t mean to generalise, but I’ve begun to think that the ‘P’ doesn’t stand for ‘Provisional’, but rather it means you’re sharing the road with a ‘Philosophical’ driver. I say this because most P-platers seem to adopt a philosophical approach to speed limits – they are there to be considered, not obeyed. Philosophical drivers interpret speed limits as they see fit, as being up for debate and most oftentimes outright ignored.

So what does this have to do with finance? The commonality is that irrational drivers (like the ones helping you push the B-Double up the hill) are as prevalent as irrational investors. People want to buy when they should be selling; sell when they should be buying; want gold when they should be in oil; and want shares when they should be in cash. Irrational investment choices can be just as damaging for your financial health as a run in with the Tailgater is bad for your rear bumper. Avoid both as much as you can.

Go gadget go!

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 11 March 2017.

I recently set up a Wi-Fi enabled indoor/outdoor weather station at home. From anywhere in the world it allows me to log in and check the temperature both indoors and outside; investigate CO2 and sounds levels in the kitchen and a host of other functions. If I could be tempted to pay for the optional extras it would also automatically measure rainfall and wind speed, all nicely plotted with charts and diagrams. At the same time I also set up a bunch of Chromecast Audio devices. These nifty little devices allow you to connect all your old stereos and sound systems to your home network. You can stream music to every room in the house at the same time, or just to a particular room if you felt like it. No need for an expensive new sound system, as one of these turns your old boom-box into a smart radio. And all this technological whiz-bangery is on top of the solar-powered internet relay station I had to build in the top paddock to beam the internet down to the house. The fact is, the average house these days probably has more technological devices and gadgets than the first few shuttles that NASA sent into space. We take it for granted that we can hold a video conversation with someone on the other side of the world while sitting in the kitchen holding a mobile phone. I’ll bet that NASA wished Skype existed 50 years ago – no question of the moon landings being faked, we could have all watched it live on our phones.

Technological change has not missed the financial sector either. Some people have a financial adviser they’ve never met; having only ever had conversations via video. If a video relationship isn’t your thing, you can let a computer make investment decisions for you – just upload your portfolio (and credit card details), click ‘Go’ and sixty seconds later get back a computer generated report telling you what to buy and sell. Automatic spare change investments, peer-to-peer lending; crowdfunded capital raisings, fractional residential property investment…the list of investment-related technological initiatives is a long one. However, it’s probably worth asking whether or not all of the clever technological advances actually result in better outcomes? Just because a computer can select a portfolio for you and deliver it in a snazzy way straight to your mobile phone, should you let it? While it might be fun (for a while) to check the temperature in my house from anywhere in the world, would I want my weather station to look after my life savings? Not before hell freezes over – an event my weather station tells me is most unlikely.

Call me John

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 25 February 2017.

Now that I am on the wrong side of 40 (to be fair, I’ve been on the wrong side for some time), I have noticed a very unwelcome development. Every night, while I sleep, something or someone, is slowly transplanting John Howard’s eyebrows onto my own. It started off innocently enough – a stray eyebrow hair here, the odd misaligned hair over there…now however, whomever is doing this to me is working very diligently at giving me the full John Howard makeover. My hair appears to be in on the act too, rapidly pushing me to a place where I’ll be forced to ask the hairdresser for the ‘John Howard’ look when it comes time to discussing potential styles. It’s got to the point where complete strangers stop me in the street to discuss WorkChoices. Seriously though, why is it, that as you age your body stops growing where you want it to keep going – your brain, your hair – but keeps growing just where you want it to stop – your nose, your ears and your eyebrows? Why can’t your body direct its meagre resources to where they are needed most? Don’t give me ears the size of dinner plates, give me a head of hair that would make an Afghan Hound proud.

The slow and insidious process of relocating John Howard’s eyebrows onto my own is an example of significant change happening at such a slow pace that it is easily missed. I only noticed it myself when my wife lunged at me one day with the garden shears and a whipper snipper. It’s very easy to miss the fact that a series of small, seemingly unimportant changes, actually amount to a complete paradigm shift. Global events over the past twelve months may well represent one of those occasions. Political developments in the UK, US and Europe may not individually be earth-shattering, but taken together there is evidence to suggest that serious change is afoot. Brexit, Trump and political events in Europe all have underlying commonalities which should not be ignored. From an investment perspective, change can be both an opportunity and a threat. The threat, of course, is that political change brings economic and financial change which your investments are ill-equipped to manage. The opportunity is to make changes to your investment approach such that you are ahead of the curve. It may well be that we are entering a period where return of your capital is more important than return on your capital. Taking a conservative approach is of course one which John Howard himself would approve.

A Vegemite sandwich

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 11 February 2017.

When it comes to lunch at work, I’m a little bit old school, preferring to bring lunch to the office from home, rather than popping out to grab a sandwich from a shop or takeaway. It’s often a healthier choice and generally much cheaper too. One day last week I was particularly looking forward to lunch – the previous night’s dinner had been an Asian-style BBQ pork salad; a refreshing mix of chargrilled pork, fresh salads, garlic, chilli and coriander. A perfect dinner during the hot summer months. There were enough leftovers to cater for lunch the next day and Liz offered to make a sandwich with the leftovers for me to take to work. So you can imagine my sense of anticipation the next day when I sat down to eat my lunch while reading the Financial Review, as is my usual habit. You can also imagine my disappointment when I opened my lunch box to find only a sad looking Vegemite sandwich. To be fair, the lunchbox itself should have been a giveaway – it has been a long time since I demanded that my lunch was packaged in a Star Wars lunchbox.

As great as my disappointment was, I can only imagine how great was Jack’s surprise (at about the same time as I discovered my Vegemite sandwich) at finding his lunch was a delicious Asian-style BBQ pork salad sambo. No doubt his fellow classmates in Year 1 were impressed with Jack’s sophisticated palate. While most them were most likely also having a Vegemite or jam sandwich, Jack was on the cutting edge of Asian fusion style cuisine. Alas, I know for a fact that all he did was take two small bits out of the crust and politely returned the sandwich to his mum, along with the request that he never ever again be sent to school with such a disgusting lunch.

For my part, as I unenthusiastically ate my Vegemite sandwich, I reflected on the fact that this experience was not unlike that of investing. When you make an investment decision, what you get is not always what you expect. You may be expecting annual returns of 10% plus, but may find that the real outcome is something entirely different. As far as investing goes, the potential for disappointment in the outcome is part of the territory. Just as there are risks in getting someone else to make your lunch for you, there are risks in investing too. Unfortunately, what you end up with may not be so much gourmet, as garbage.

The unhandyman

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 29 January 2017.

This past week I have been busy ‘renovating’ the laundry at home. I’ve put the word renovating in inverted commas as, theoretically what I have been doing is a renovation, but in practice it’s in a category all of its own. When the previous owners added on the laundry extension they stopped after putting in the framework and studs – there were no walls or ceiling and no flooring on the slab. As you can imagine, this became a haven for spiders, bugs, dust, dirt, snakes and who knows what else. I could feel my white business shirts cringe every time I took them into the laundry for a wash. Accidentally dropping a shirt on the floor was enough to make you cry.

Armed with some nails, a hammer and lacking only really a clue about what I was doing, I set about finishing off the laundry. To be honest, looking at the finished article, I wonder why I bothered. I’m not entirely sure I have made an improvement on the dirt, dust and spider heaven. It’s as though you got a builder in to do the work for you, but before he could start you got him drunk and then made him work in the dark. I now have to find a way of convincing my wife that she need not go into the laundry ever again and we’re better off just buying new clothes every time something needs a wash. An expensive solution yes, but better than letting her see my unhandiwork in the laundry.

As I stood there and reluctantly viewed my ‘renovation’ job, it occurred to me that my attempt to finish the laundry was not unlike the approach that many people adopt to looking after their finances. Just because I had the tools to tackle the laundry (the hammer and nails), didn’t mean I had the knowledge how to use those tools to do the job at hand. In the same manner, the ability exists for you to manage your own investments and finances – the tools are there, but that doesn’t mean you necessarily know how to use them. In the wrong hands, an online stockbroking account can be more dangerous than a badly wielded hammer (and I saw a lot of that during the past week, and felt it in my thumbs too). The convenient and cheaper approach of doing it yourself is not always best. Getting professional assistance may be more costly, but the outcome usually more than justifies the cost. Ask yourself if you realistically have the skills required; and if you don’t, get some help. A badly managed retirement plan is much more serious than a badly mangled renovation job.

A vegemite sandwich

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 11 February 2017.

When it comes to lunch at work, I’m a little bit old school, preferring to bring lunch to the office from home, rather than popping out to grab a sandwich from a shop or takeaway. It’s often a healthier choice and generally much cheaper too. One day last week I was particularly looking forward to lunch – the previous night’s dinner had been an Asian-style BBQ pork salad; a refreshing mix of chargrilled pork, fresh salads, garlic, chilli and coriander. A perfect dinner during the hot summer months. There were enough leftovers to cater for lunch the next day and Liz offered to make a sandwich with the leftovers for me to take to work. So you can imagine my sense of anticipation the next day when I sat down to eat my lunch while reading the Financial Review, as is my usual habit. You can also imagine my disappointment when I opened my lunch box to find only a sad looking vegemite sandwich. To be fair, the lunchbox itself should have been a giveaway – it has been a long time since I demanded that my lunch was packaged in a Star Wars lunchbox.

As great as my disappointment was, I can only imagine how great was Jack’s surprise (at about the same time as I discovered my vegemite sandwich) at finding his lunch was a delicious Asian-style BBQ pork salad sambo. No doubt his fellow classmates in Year 1 were impressed with Jack’s sophisticated palate. While most them were most likely also having a vegemite or jam sandwich, Jack was on the cutting edge of Asian fusion style cuisine. Alas, I know for a fact that all he did was take two small bits out of the crust and politely returned the sandwich to his mum, along with the request that he never ever again be sent to school with such a disgusting lunch.

For my part, as I unenthusiastically ate my vegemite sandwich, I reflected on the fact that this experience was not unlike that of investing. When you make an investment decision, what you get is not always what you expect. You may be expecting annual returns of 10% plus, but may find that the real outcome is something entirely different. As far as investing goes, the potential for disappointment in the outcome is part of the territory. Just as there are risks in getting someone else to make your lunch for you, there are risks in investing too. Unfortunately, what you end up with may not be so much gourmet, as garbage

Make everything great again!

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 14 January 2017.

The start of a new year is always an exciting time; an opportunity to look ahead with hope and anticipation. To push the reset button and forget about the year gone past. And what a year that was! 2016 was not the worst year we’ve ever seen – no major wars, crises or market collapses, but it still seemed to be a dramatic one. The UK decided it didn’t want to play in the European sandpit anymore; Malcolm Turnbull snuck back in the Lodge by a wafer thin margin and in the US, well, let’s just say that everything is apparently going to be great again! The truth is, every year has its ups and its downs. Humankind has an amazing ability to create new and novel ways to do both good and bad. From an investment perspective, the key to surviving any year is to make sure you have a plan. The old saying, failing to plan is planning to fail, really is true. Sure the odd major event might throw a spanner in the works (such as another global financial crisis), but having a financial plan helps to keep you pointed in the right direction, regardless of the odd bump encountered on the way.

A good financial plan is one which can adapt to the world around it. Just as circumstances change, so should your planning. Unfortunately, governments have a tendency to make unanticipated decisions which can have a major financial impact. While it’s not necessarily a requirement to predict those adverse decisions in advance, it is advantageous if you are able to adapt your finances to the new regime. The issue of superannuation is a perfect example of the ability of regulatory change to cause chaos. While you would assume the government is happy for more and more of us to be financially self-reliant during retirement, that is not necessarily the case. For every dollar that we squirrel away in superannuation, the government loses a few cents in additional tax revenue. It’s a case of long term gain (fewer retirees on the Age Pension) versus short term pain (less tax revenue now). Unfortunately, few politicians have a timeframe which extends past the next election. From their perspective, a few extra cents in tax now, is better than saving a few dollars in pension payments in twenty or thirty years’ time. That will be someone else’s problem, while the current crop of pollies will be retired on their generous government pensions by then. Here’s a new year’s resolution for our political leaders – stop squabbling amongst yourselves and let’s make government great again! It can’t be that hard, can it?

Pass the panadol

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 31 December 2016.

As I write this, we’re nearing the end of the year. In fact, if you’re reading this in the paper, it’s New Year’s Eve and you are no doubt debating whether or not to stay up until midnight to see in the New Year. I’ve found that as we started to have children, each successive one seemed to lop an extra hour off my ability to make it to midnight. With three kids this means I’m lucky to make it to 9pm. In pre-children days that was when the party was only getting started. Now however, I know that by six in the morning I’m likely to have two, if not three, small people yelling at me and demanding to be fed and entertained. Only a man more brave (or foolish) than me would stay up until the wee hours, knowing that was the fate which awaited him.

The end of the year is of course a perfect time to look back and consider your progress and achievements, particularly in regards to your finances. There’s no need to make it too formal, or else you’re unlikely to actually do anything about it; rather, just ask yourself a few questions and be honest with yourself. Things like: did you make much progress in reducing your debts this year? Were you able to add extra money to your savings or superannuation? Were you able to control your spending this year? We all have the odd occasional unexpected expense, but spending more than you earn is a certain path to financial trouble. Are all your insurances in order and are the insured amounts appropriate? Many people vastly underestimate how much life, home and contents insurance they need. Make time to review your policies.

The end of the year is also a good time to make some plans for the year ahead. Are there ways you can save more next year? If you’re lucky enough to get a pay rise next year, why not commit right now to salary sacrificing it to superannuation, rather than taking it as extra pay? If you were living well enough without the extra money, you won’t miss it anyway. Can you pay more off your mortgage? Changing your phone or electricity company can save money – direct it to your mortgage instead. Most importantly of all, save some money for yourself. There’s no point having a fat bank account and living on bread and potatoes. Indulge yourself every now and then, but do it sensibly. Failing to keep your finances under control is a lot more serious than dealing with three toddlers on a hangover.

All in on red

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 17 December 2016.

I read a book recently which told the story of a man who lived in Melbourne, working as a croupier at Crown Casino, and how he invested in the stock market. Spending that much time in a gambling den must have had an impact on his investment approach, which consisted solely of looking for a company with a share price close to $0.01 (a so-called ‘penny dreadful’), putting his entire life savings into the company and hoping for the best. On two occasions he managed to turn over a hundred thousand dollars into nearly a million, only to lose it all. On the third occasion (you’ve got to give him credit for being persistent) he tried the same approach, struck a winner and made nearly two million dollars in profit, enough to chuck in his croupier job and become a stay-at-home dad and fulltime investor.

Sounds great doesn’t it? A struggling everyday Joe strikes it rich through the share market and lives happily ever after. In reality however, this is the exception rather than the norm. As befitting his time spent in a casino, the hero of our rags-to-riches story was really doing nothing more than gambling. You could argue, statistically speaking at least, that he would have been better off to put his life savings on red at the roulette table and leave it there for a couple of spins. Certainly the odds of the roulette ball landing on red three times in a row are probably better than the likelihood of picking one company from the five thousand on offer on the stock market, and then watching it quadruple in value.

For most people, losing their entire life savings (twice!) is simply too much to bear, despite the allure of a potential massive payday. For every croupier-turned-millionaire there’s probably ten thousand ‘investors’ who’ve lost their shirt by mistaking the stock exchange for a casino. Undoubtedly there is a myriad of ways to make (and lose) money on the stock market. Betting your life savings on the roll of a dice may well be your thing; there’s also merger arbitrage, long/short pairs, rumourtrage, momentum investing and enhanced options trading strategies. It really is like one of those ‘Choose your own adventure’ books which made a brief appearance in the mid-nineties. For normal, sane and rational investors however, none of these methods are likely to leave you able to sleep at night. If a sound night’s sleep is important to you, an investment adviser can help; otherwise, I have a book I can lend you to help pass the hours.

Be the best

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 3 December 2016.

My wife and I recently attended a parent teacher interview at our eldest son’s school. Jack is only nearing the end of kindergarten, so perhaps my expectations were set a little bit too high, but I came out of the meeting feeling underwhelmed. We were shown some of his drawings, his list of sight words, his level of reading ability and the extent of his numeracy skills – all interesting enough information, but I wanted more. Perhaps it’s my finance background, but I felt the relative performance aspects of his year in kindy were impossible to ascertain. In which percentile of his class for reading skills does he fall? What about compared to other kids in NSW? In Australia even? How does his ability to recognise shapes compare to everyone else in his class? Where would he rank nationally in terms of his drawing ability? Are his colouring-in skills in the top 1% of kindy kids in the country? And so on. When I raised these important questions with my wife, Liz, after the meeting, her reaction was simply to laugh at me, karate chop me in the solar plexus and tell me to stop being so stupid and relax. Clearly the issue of relative performance is not one which keeps her up at night.

When it comes to investing however, relative performance is about as serious a topic as one can get. If I told you that your investments generated an annual return of 10% in the past year, you would probably be quite happy. 10% per year is pretty good, at that rate it would only take around 7 years to double your investment. However, if I then told you that everybody else in the world made at least a 20% annual return, how would you feel? Not nearly as happy I suspect. It’s your performance, relative to an appropriate benchmark, which is most important. The appropriateness of the benchmark is critical too. There wouldn’t be much point for Jack’s teacher to tell me that Jack was in the top 1% for skipping when compared to children aged six months or less. That’s a useless comparison and provides no information on how he compares to other kids in kindy, which is the most relevant benchmark for him to be compared against. If you’re investing in shares and your performance is being compared to interest rates on a savings account, you’re also not learning anything useful. Relative performance may not matter when you’re a five year old and just embarking on a lifetime of learning and development, but when you’re talking about your life savings, it really is no laughing matter.