In stark contrast to the “meme stock” era of just a few short years ago, a new trend is rising on the internet, one that drops the FOMO (Fear of Missing Out) in favor of something a bit more relaxed.
The trend, “VOO and chill,” is inspired by the self-professed “Bogleheads,” a play on the name of the late Vanguard founder John Bogle.
At its core, the strategy advocates for ignoring market noise and simply buying the Vanguard S&P 500 ETF (VOO), prioritizing time in the market over timing the market.
There are also variations of the strategy, such as the “Three Portfolio” strategy that uses the Vanguard Total Stock Market ETF (VTI), the Vanguard Total International Stock Index Fund (VXUS), and the Vanguard Total Bond Fund (BND).
It’s little more than traditional asset allocation, albeit with fewer funds and fewer moving pieces.
But is it really all you need?
There’s a strong case to be made that, if you’re in the right phase of your investing journey, “VOO and chill” is a perfectly viable investing strategy.
Since 1957, when the S&P was expanded to 500 stocks, the index has returned 10.4% annually with dividends reinvested.
If you go back further, to the inception of the S&P index in 1928, simply buying the index has returned 8.5% annually (5.2% when accounting for the 3.3% average inflation rate over the last 100 years).
A classic 60/40 portfolio (60% stocks and 40% bonds), on the other hand, has returned closer to 8.3% on average over the last 122 years (5% real returns per this study and factoring in inflation of 3.3%).
In other words, each approach offers comparable annual returns.
Is “VOO and Chill” an Easy Way to Invest for the Long Haul?
The biggest risk to simply relying on the returns of U.S. (predominantly) large-cap stocks is in the big drawdowns.
During the Great Financial Crisis, a 60/40 portfolio would have suffered a 30% drawdown, whereas the S&P 500 lost more than 55%.
If you were fully invested and not dollar-cost averaging at the time, it would have taken six years for your investment to get back to even.
And that’s the crux of it.
VOO and chilling only works if you have time to recover or, even better, if you’re continuing to buy as the market retreats.
It’s an unacceptable level of risk if you know you’ll be drawing those funds down in the next 5-10 years.
So, for young investors, a strategy like “VOO and chill” offers a lot of benefits:
- It advocates for long-term investing.
- It’s a system-based strategy not subject to emotional whims.
- It’s low-cost and easy to implement.
- It promotes dollar-cost averaging.
- Its long-term history of returns supports it.
But… it’s not a perfect strategy for all folks at all times, especially if you’re approaching retirement (or if the funds are earmarked for something with a deadline in the next few years; e.g., college for a child who’s already in high school, paying for a wedding, a house, etc.).
It also doesn’t account for investor preference. Many investors are quite successful with more active investing strategies and prefer them to passive investing. (I’ll always advocate for a core and explore portfolio that uses some version of low-cost index investing while you take a more active role in a portion of your portfolio.)
So, if you’ve got retirement on the horizon and you’re considering passive strategies, lean on a blend of low-cost index funds that includes an allocation to bonds.
But if you’ve got decades of investing ahead of you, opting to “VOO and chill” is far from the worst strategy you could adopt.
After all, it certainly beats meme stocks.
