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Talking Finance

DIY trouble

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.

Goodbye car

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.

The Black Swan

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

In 16th 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.


Make me happy

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.

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 bites 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.

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?