Couple in Parkas sitting on a couch shivering

Index and Chill Could Leave You Out in the Cold

Why the “Index and Chill” Strategy

could leave you out in the cold.

You’ve probably heard, and maybe even believe that time in the market beats timing the market. The long term trajectory of the stock market would certainly bear out that assumption. The S&P 500 has historically returned about 10% on average every year (source). Day traders on the whole are mostly unsuccessful with only a few skilled.. or lucky, winners. Still, blind faith in this one principle could harm you and here’s how.

Long Term Trajectory, but short term flat spells

There have been several stretches where a downturn in the market took years to recover. If you are not clearly aware of two critical factors pertaining to your personal situation, you could get caught in a long spell of flat growth. The chart above clearly shows how you might hit a period where placing all your long term savings in an index fund and leaving it alone may not yield the expected outcome in the critical timeline for your situation.
A chart of the stock market showing the long term overall growth with periods where it took years to recover to a previous high

Here are two things to consider:

  1. Risk profile – This is not just your personal stomach for market ups and downs, but also what risks are affecting your specific goals and the investments that are powering them.
  2. Timeline – Short-term goals or near-term targets, like retiring or taking a year off in the next 3 years might mean your timeline should take into account the possibility that some of your investments should be diversified to manage a prolonged flat spell or downturn. 

That means your investment choices might be more complex than just indexing and chilling. Consider asking an advisor to review your goals and the investment decisions you are relying on to get you there. In fact, a good advisor can help you understand why mitigating your losses in a downturn can be one of the best ways to succeed in the long run.