Here’s a chart showing the SP500 since July ’96. You can see that it has been in a range from 700 to 1600. The obvious problem with investing long term over that time period is that a person could have made a lot of money on the way up but then it reversed for such a long period, again and again. Let’s test it.

Using the monthly chart below for buy/sell signals over the last 13 years:

Buy: 800 (May ’97) -

Sell and go short: 1247 (March ’01) = 55% gain (10,000 becomes 15,590)

Buy back and go long: 1055 (Nov ’03) = 18% gain (15,590 becomes 18,427)

Sell and go short: 1,380 (Feb ’08) = 30% gain (18,427 becomes 24,103)

Buy back and go long: 1060 (Sept ‘09) = 30% gain (24,103 becomes 31,380)

Total: 200% increase in 13 years (10,000 became 31,380) = 15% per year (or 9% compounded)

Buy and hold: 1,048 / 800 = 31% ($10,000 became $13,000) = 2% compounded over 13 years

The chart is hard to read but each point above was chosen because it was the price on the last day of the month after the price crossed (over or below) the pink and blue lines. If you compare the points I chose you can see that they weren’t even close to the tops and bottoms because catching those points would be next to impossible. Even though we could have bought lower or sold higher, these buy/sell points are made only after a trend direction has been determined.

Since that chart uses only monthly points each candlestick is very long meaning the SP500 price varied greatly during the month. Using a monthly chart we limited our buy/sell points to very long-term trends and missed a log of smaller trends that are buried within the monthly candlesticks. What I’m trying to say is that there are smaller trends within these trends that could be traded to create even more entry/exit points and potentially catch the trend earlier than we did in this example. Imagine waiting a full month (or 3 months) to make sure a trend is underway before selling. A weekly or bi-weekly chart could identify trends even earlier.