Why “VOO and Chill” Lost Money for 8 Straight Years: What $100,000 in the S&P 500 Did From 2000 to 2008

The classic Bogleheads three-fund portfolio divides your money among U.S. stocks, international stocks, and bonds. Today, three of my preferred ETFs for implementing it are the Vanguard S&P 500 ETF (VOO), Vanguard Total International Stock ETF (VXUS), and Vanguard Total Bond Market ETF (BND).

But I’m seeing a different trend, particularly among younger investors who grew up during the growth and technology stock boom of the past decade: “VOO and chill.” Buy the S&P 500, keep contributing, and don’t worry about anything else. That approach has also been reinforced by prominent investors such as Warren Buffett, who has maintained a strong U.S. home-country bias and famously advised investors to “never bet against America.”

The average investor isn’t Buffett, though. They don’t have his capital, investing acumen, or formerly very long time horizon. I still think “VOO and chill” is considerably better than picking individual stocks. But history offers several examples of where an all-U.S. portfolio could fall short, and the turbulent period beginning in 2000 provides a particularly useful one.

What Happened to U.S. Stocks After 2000?

The late 1990s produced one of the largest speculative booms in U.S. stock market history. Internet and technology stocks soared, valuations expanded, and the S&P 500 entered 2000 heavily exposed to companies whose prices reflected extremely optimistic expectations.

Then the dot-com bubble burst. Technology stocks collapsed, the U.S. economy entered recession in 2001, and the Sept. 11 terrorist attacks added another shock. The S&P 500 suffered three consecutive calendar-year losses from 2000 through 2002.

Stocks eventually recovered, but investors didn’t get much time to enjoy it. The housing and credit bubbles were already building during the subsequent expansion, setting the stage for the global financial crisis. By 2008, U.S. stocks were entering another major bear market.

International stocks and bonds followed different cycles. International equities benefited from different sector exposures, currencies, and economic conditions, while bonds generated positive returns without requiring the U.S. stock market to recover.

Now, VOO, VXUS, and BND don’t share a live history stretching back to 2000. Fortunately, Vanguard has older Investor Shares mutual funds with similar strategies that provide useful proxies: Vanguard 500 Index Fund Investor Shares (VFINX), Vanguard Total International Stock Index Fund Investor Shares (VGTSX), and Vanguard Total Bond Market Index Fund Investor Shares (VBMFX).

I backtested all three from Dec. 31, 1999 through Dec. 31, 2007, with distributions reinvested using Testfolio.

The S&P 500 didn’t literally lose money over this eight-year window in nominal terms, but its 13.19% cumulative gain was tiny compared with international stocks and bonds. Remarkably, the bond portfolio almost kept pace with international equities. But inflation makes the results considerably worse.

After adjusting for inflation, $100,000 invested in the S&P 500 proxy finished the eight years with eroded purchasing power of only about $90,696. International stocks and bonds, meanwhile, both produced positive real returns exceeding 30% cumulatively.

Diversification Means You Don’t Have to Pick the Winner

The lesson I take from this period isn’t that investors should dump VOO for VXUS or BND. The winning asset class changes, and knowing which one will lead over the next decade is precisely the difficult part. That’s the rationale behind the three-fund portfolio. Instead of making one large bet on U.S. stocks, you own all three major building blocks.

For an investor comfortable with substantial equity exposure, one example could be 60% VOO, 20% VXUS, and 20% BND, rebalanced annually. That’s still an 80/20 stock-bond portfolio and still has a sizable U.S. equity allocation. But you’re no longer entirely dependent on the S&P 500 delivering strong returns during the exact period when you need it to.

Diversification will inevitably mean owning something that’s underperforming. Over the last decade, that frequently meant watching U.S. stocks beat international stocks and bonds. From 2000 through 2007, the roles were reversed.

That’s why I’d be careful about extrapolating the success of “VOO and chill” indefinitely. An S&P 500 ETF remains an excellent core holding. History suggests there can also be surprisingly long stretches when owning something else alongside it matters.

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