VWCE & Chill…s down my spine

I’ve been moderator of an Italian subreddit about personal finance for the last five years. It is the Italian subreddit r/ItaliaPersonalFinance, and as you can guess, it is about the broad topic of personal finance.

There’s a lot more than what people think when we talk about handling your cash nest and investing it. The favourite motto of the ItaliaPersonalFinance subreddit is “VWCE & Chill”: just buy 100% VWCE (an ETF covering most of the developed and developing countries in the world, market-cap weighted), sit back and relax, while your money will eventually grow (in about 10 years time).

But the analogy that comes to mind, when thinking about “VWCE & Chill”, is getting prescribed generic pills at the first visit of a patient to their psychiatrist. The physician doesn’t know anything about the person in front of them, they don’t know their history, their thoughts, the depth of their possible illness, and still prescribe to “just take these pills and see how you feel”.

You may see some improvement, things can go nicely for a while; but in the end, the real effect of a mindless choice will manifest itself and blow in the face of the patient, that will visit another physician, maybe a better one, who will show the inner weakness of the choices of the first one.

That’s to say, it’s not a bad idea per se. It’s a much better idea than going to your bank and make them invest your money (want to gift 3-8% of your invested money each year in commissions?). It’s an even better idea than just opening your brokerage account and then buying some random, popular stocks, and expect them to grow without a single drop. But it’s not what the Latins called a panacea, a remedy for all possible personal finance issues. It’s more of a generic anti-inflammatory drug, to be administered with some care, and knowing we’re just treating symptoms, most of the times.

Enough with the medicine metaphors: let’s dig into the issues.

Some issues with generic investments’ advice

  • Everything’s changing faster than we realize As some old sage man once said, humans tend to think as if their present self, their current desiders, dreams, ambitions, etc., will never change again, if not for some smaller adaptations as we get older. When some folk on Reddit tells us “Only invest in stocks if you’re not going to touch this money for 10 years at least”, we find great joy in spending that money into VWCE, since the idea of the next 10 years of our life being stable and financially secure is appealing and pleases the self. But reality often unveils the lies we tell ourself… even in a traumatic way, sometimes.

  • Being young doesn’t automatically mean you should invest in stocks Common wisdom in the personal finance world tells us that young people should invest in stocks more (in percentage of their funds) than older folk. I think this is a huge simplification, and even plainly wrong in some cases. In fact, I’m around 30 years old, and a lot changed in my life. Even something as my car, I sort of regret buying now, since I work from home and I don’t really need a vehicle in my own belongings any more. While five years ago I was absolutely certain I’d never own a house in my life, it looks like I will soon. And the list goes on. Stocks are, from the return point of a view, very static assets. You should generally own them for a long period of time before you can safely say they will have given something in return: stocks tend to live through long periods of slow growth, and sudden catastrophic free falls, before recovering. Bonds, on the other hand, unless the emitter defaults or “cuts” the promised coupons, have a very specific time-frame (even Bond ETFs… although it’s a bit more complicated). Also, generally speaking, young people tend to have a low saving rate, due to salaries being lower, and the best investment they should make with the little money they have, is learning new skills and tools, which can return a huge compound interest over time, instead of throwing the money into financial markets. [For this specific idea, and the thoughts it provoked in me, I have to thank Paolo Coletti, an Italian youtuber active in the finance and investments world.] But, as always, looking at the average young person doesn’t provide answers for a lot of different people coming from different backgrounds, families, living in wildly different part of the world. Don’t just take the generic advice: it could be tragically wrong for you.

  • Risk aversion is a real thing, and nobody can really assess their own until things go south I think years of growing financial markets, especially with stocks, have altered the common perception of risk among everybody. I’ll make a gross simplification in the next lines, but bear with me: I think it’s needed as a wake up call for a lot of us. Investing is stock is throwing your money at unknown people (the “market”), and expecting them to use it in unknown moves and make you earn more, but with no financial obligation to return any of the money given. Imagine having 80 or 100% of your hard earned cash in the hands of these people. Does it feel safe? How about bonds? Bonds are a contract, but still, a slim one. There’s absolutely no guarantee the people you lend money to will effectively give it back. In the contract it is clearly stated that it’s their right to default on the promise, should things go wrong. And whether they’re using your money wisely or wasting it, is really out of your hands. You’re betting on a bet safer than the casino’s, but still, it is betting. History of the last 50 years may show your bets are expected to give a nice premium. History of the last 100 years shows instead in what dangerous waters you’re swimming. People can and absolutely will lose money when they’re betting. Not always, and that’s why we bet. And I’m not sure we can really assess our own risk aversion, just thinking about the hypotetical event of having our portfolio down 70% from when we bought it, unless we really are in that situation. Also because, it’s not like newspapers and media have a positive outlook on the economy when stock markets are so deep down the toilet: most probably, they’re talking about the end of finance as we know it, apocalypse and doom for the few crazy guys still holding stock ETFs. And it’s hard, almost impossible, to have a detached point of view and, instead of panic selling, buying more due to a one in a lifetime occasion of low prices.

Wrapping up

I’m not advocating for financial advisors: the reality is, most of us don’t have enough to be a customer for these people, and other solutions (robo advisors, or even, God forbid, bank advisors) are generally too expensive to be worth it (at least where I live). I think everybody should invest some time into learning personal finance and investments, but it’s probably just a distant dream. We’ll see: for the time being, I encourage you, my dear reader, to rethink your risk tolerance/aversion, your asset allocation, and be aware of the fact that our lives change, multiple times per decade, and it could be better for you to have an elasticity in your investments, instead of a complete, static commitment on the best returning asset class.