Forget VOO. “VT and Chill” Owns 9,000 Stocks and Skips the Lost Decade Problem

U.S. stocks dominated the past decade, but history reveals long stretches where betting on America cost investors dearly in real purchasing power. A single ETF spanning 9,000 stocks across dozens of countries sidesteps the need to predict which market wins…

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Two of the most popular ETF investing strategies on the internet have their own catchphrases: “VOO and chill,” referring to the Vanguard S&P 500 ETF (VOO), and “VT and chill,” referring to the Vanguard Total World Stock ETF (VT).

Which is better depends on whom you ask. Warren Buffett, who famously advised investors to “never bet against America,” would probably be comfortable with the U.S.-heavy approach. Spend enough time in the Bogleheads community, though, and you’re more likely to encounter an emphasis on maximum diversification across U.S., developed international, and emerging markets.

I think a lot of today’s investors are inevitably influenced by what they’ve experienced. Over the past decade, U.S. stocks have dominated, with growth stocks and especially large technology companies accounting for much of that leadership. Owning international stocks frequently felt like unnecessary baggage.

But there have been extended periods when the opposite was true. One particularly useful example is the period from the beginning of 2000 through the end of 2007, part of what investors commonly call the “lost decade” for U.S. stocks. Here’s what happened, and why a globally diversified portfolio resembling VT would have sidestepped much of the problem.

Imagine investing $1 million in U.S. stocks on Dec. 31, 1999. The timing could hardly have been worse. Technology stocks had soared during the dot-com boom, valuations were elevated, and enthusiasm surrounding the internet was everywhere.

Then the bubble burst. Technology stocks collapsed, the U.S. entered recession in 2001, and the Sept. 11 terrorist attacks added another economic shock. The S&P 500 declined for three consecutive calendar years from 2000 through 2002.

Stocks eventually recovered, but the next expansion brought its own problems. Housing prices surged, leverage accumulated throughout the financial system, and by 2007 the subprime mortgage crisis was beginning to emerge. The global financial crisis followed in 2008.

VT didn’t exist throughout this period, so we can’t directly backtest it. But Vanguard has older mutual funds that provide useful proxies for its underlying exposures: the Vanguard Total International Stock Index Fund Investor Shares (VGTSX) and the Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX).

From Dec. 31, 1999 through Dec. 31, 2007, the difference was substantial according to Testfolio:

Inflation makes the comparison even more revealing. In purchasing-power terms, the S&P 500 investor actually lost money: