This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 3 June 2017.

I spent a significant portion of this weekend assembling some kitchen cabinetry. There were two flat-packed pantry cupboards I had picked up from a large hardware store (I won’t say who the store was, but let’s just say that I have eaten my fair share of sausage sandwiches there in my time). The cupboards were made of that chipboard melamine stuff, which is what seems to pass for real furniture these days. Presumably this was some ancient old growth Tasmanian tree, chopped down and turned into woodchips, shipped to China and eventually found its way back to Australia in a significantly less desirable form. The assembly was straightforward enough, but when I was finished I noticed that both cupboards had a slight lean. Also, the doors didn’t close properly and somehow the cardboard backing of each cupboard poked past the top of the cupboard. Now, while it’s true that I am never going to win a gold medal in the handyman Olympics, it seemed odd to me that both cupboards were so clearly misshapen. Some of the issues may have been my fault (and I accept that I put the backing on the wrong way around – twice) but it wasn’t all my doing.

Fortunately, our house is so full of DIY disasters that a couple more just blend into the background, but in a newer house (say, anything built since the end of World War I) the saggy and unbalanced cupboards would be obvious. In retrospect, I think this was simply a matter of getting what you pay for. Not that I considered $189 per cupboard to be an insignificant sum of money, but it was a fraction of what it would cost to hire a cabinetmaker to build a similar product from scratch. Of course, the quality of a skilled cabinetmaker’s work would have been on an entirely new level. When it comes to managing your finances, the issue of costs and fees is also an important one. While keeping your investment costs low is important, this is one area where you don’t really want to be paying peanuts and getting monkeys. Yes, a small difference in fees will make a significant difference to your financial situation over a long period of time (as the industry super fund advertisements often remind us), but the impact of a few percentages points less in performance, or the mistake of pursuing the wrong financial strategy altogether, is likely to far outweigh the small savings achieved by opting for the lowest-cost investment option. Put it this way, do you want the chipboard version of a retirement plan, or the solid oak variety? I know which one I would prefer.

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 5 May 2017.

I had a car accident over the weekend. Nothing too serious fortunately and most importantly nobody was injured. It wasn’t your typical car crash really – no high-speed manoeuvres or screeching brakes. I was in a car park looking for a park. Ahead of me a very large 4×4 started backing out of its park, so I stopped to let it finish and move off. To my alarm, it turned toward me and began to accelerate. I mumbled something under my breath along the lines of ‘surely they can see me’, but it continued to pick up speed and back towards me. At the last moment, I tried to both put the car into reverse and lean on the hooter, failing to do either very effectively. With that the 4×4 crashed into the front of my car, almost landing on the front bonnet. To say I was a little surprised that the driver hadn’t seen me was an understatement. You can imagine my surprise however, when it turned out that there was no driver! The details are a little unclear, but it seems that the car may have been left in neutral without the handbrake on, allowing it roll out of its park and pick up speed as it hurtled down the hill.

In some way, it was fortuitous that my car was there to stop the runaway 4×4. There were quite a few pedestrians about, including small children, who would not have even heard the 2 tonnes of metal rolling down the hill, so placing my car in the way could be seen as an act of self-sacrifice. That’s what I told my car anyway, as it was towed away to an uncertain fate. Being involved in a car crash (albeit a minor one), got me to thinking about stock market crashes. There are some similarities: both result in damage, either financial or physical; both are usually accompanied by lots of confusion and noise; and both can be emotionally unsettling (that said, on an individual level, a bad car crash is much worse – money is just money, but life can’t be replaced). The other commonality between the two is that both stock market and car crashes are unpredictable. If they weren’t, they wouldn’t happen. After a stock market crash, a raft of pundits will come out and say they saw it coming, but that’s often either simply untrue or wishful thinking. Nobody rings a bell (or sounds a hooter) at the top of the market. Preparing your finances to survive a crash is one thing, avoiding it altogether is another.

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 22 April 2017.

In 16^th century London, inhabitants used the expression ‘black swan’ to describe something that was impossible. The reasoning behind this was the fact that, up until that time, nobody had ever seen anything but white swans. Black swans were presumed not to exist, so anything that was thought to be impossible was described as a black swan. Then, in 1697, Dutch explorers reached Western Australia and found, to their great surprise, vast numbers of black swans! The impossible really did exist! The expression ‘black swan’ then changed over time to mean an impossibility that was later disproven. For example, the collapse of the Soviet Union seemed an impossibility, until it happened. So, the end of the USSR was a black swan event. The impossible becoming possible.

Black Swan theory was popularised by writer Nassim Nicholas Taleb, who said that black swan events had three defining characteristics: they’re unexpected; they have an extreme impact and finally, we try and rationalise the event after it’s occurrence, as though it was in fact predictable or explainable. In Taleb’s view, events such as the advent of the internet, September 11 and World War 1 were all black swan events. Taleb’s book, ‘Black Swan’, was very popular in finance circles (Taleb himself used to work for investment banks and hedge funds) and forecasting future black swans became a popular pastime for investors and analysts (which sort of defeated the whole point of a black swan event, in that it is entirely unpredictable). Some went so far as advocating investment strategies based on black swans – the aim was to position your investments ahead of a black swan event to either profit from it, or be protected from it. Again, the point was often lost on such advocates, that if you can predict the event in advance, it’s not a black swan event (at least, not in the way it was described by Taleb).

The problem with an investment approach based on predicting the next black swan (such as, putting all your assets into gold, or into cash), is that the black swan you’re waiting for may never arrive. Or a different, but equally unpredictable and severe black swan event may occur, which renders your strategy worthless. For most people, taking all-or-nothing punts on the possibility of a potentially catastrophic outcome, is a bad idea. The idea of a sound and diversified investment approach is not new, but for some people it’s also not exciting enough. When it comes to making (and managing) money however, I’ll take boring over exciting any day.

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 8 April 2017.

For some time now, I have found that I’m less and less inclined to watch the news on television. Most of it can hardly be called news anymore anyway – a murder here; a violent assault there; politicians nit-picking and back-stabbing each other for fun; corruption hearings; prison sentencing…the average television news broadcast these days is less uplifting than the obituary section in the newspaper. It turns out however, that there’s a very valid reason for my growing disinterest in the news – I’m getting old! Researchers have found that as we age, we prefer to avoid experiences and situations that increase our negative stress levels. So, the fact that I’d rather watch Iron Man (a movie largely about explosions) rather than Spotlight (a harrowing account of the exposure of child abuse practices by priests in the Boston area) says more about my age than my lack of taste in movies.

Apparently, as we get older we start to instinctively avoid places, events or situations which make us feel bad. The theory is that subconsciously, we know we are running out of time (literally), so we want to maximise the time we spend feeling good and happy. We ignore or avoid negative things and seek out those things which make us happier. In researcher-language: “This attentional bias is consistent with older adults’ generally better emotional well-being and their tendency to remember negative less well than positive information.” So rather than watch the news, with all its upsetting stories of murder and mayhem, as you get older you prefer to watch Gardening Australia or Better Homes and Gardens. Sounds like a perfectly good night in if you ask me.

A problem arises however, when we start to also avoid information that contradicts our existing opinions, on the basis that you don’t want it to upset you. This is important when it comes to investing, where a failure to keep an open mind can lead to a failure to make appropriate investment decisions. Refusing to consider views different from your own, leaves you at risk of being blindsided by change. In turns out that researchers have even identified exactly when this preference for positive experiences becomes a hindrance to effective decision-making – age 70! From then on, apparently, “…older investors exhibit worse stock selection ability and poor diversification skill. The age-skill relationship has an inverted U-shape and, furthermore, the skill deteriorates sharply around the age of 70”. At that age, your years of experience are seemingly outweighed by your poor decision-making abilities. One of those rare cases where you really are both happier and poorer. Now that’s something to look forward to.