Long term investment

If you look at any chart of the S&P 500 for any significant period of time, the one thing that stands out is that whether the long term trend is up or down, the line does not move smoothly. Now to define the period of time you are looking at is possibly the most important aspect of an analysis. If you had somehow bought into the S&P in 1960 when it was about $60 you would have experienced a significant increase by now. However, if you only started when it was at 14000, you have lost a third of your money.

So how do you invest to maximize returns on an index that has significant variations. If you follow dollar cost averaging, you would invest a standard amount on a regular basis. This theory says you will of course end up buying at both highs and lows, but if you believe that the trend is ultimately up, you will have a nice return at the end of the day. Of course, this requires a belief in the overall trend and an time period that allows you to weather the deep dips.

A better alternative is to have a strategy that allows you to invest when the market is low and reduce investment when it is high. This of course can be applied to a stock index or it can be applied to individual stocks. Now if you were to follow this strategy, you could restrict purchases to a point when the average falls below a pre-determined point, say the 200 day moving average. Of course in considering this strategy it only works as a long term strategy and is effectively the reverse of a short term trader strategy that buys when it crosses to the upside and sells when it hits it on the way down. it also requires you to believe in the long term upward trend.