If you want to know how to invest in long-term stocks for maximum portfolio gains, then you need to consider value investing, growth investing, dividend stocks, and our three-part approach
In our view, your goal as an investor, particularly if you follow our Successful Investor strategy, is to make an attractive return on your investments over a period of years if not decades. Failure means making bad investments that leave you with meagre profits or even losses.
Here are some strategies to help you successfully learn how to invest in long-term stocks:
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How to invest in long-term stocks: Value stocks
High-quality “value stocks” are stocks that are reasonably priced, if not cheap, in relation to their sales, earnings or assets. Investors hold on to them because they expect that other investors will eventually recognize their value and push up their share prices.
When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele.
How to invest in long-term stocks: Growth stocks
Although growth stock picks can be volatile, they can make good long-term investments. They may be well-known stars or quiet gems, but they do share one common attribute—they are growing at a higher-than-average rate within their industry, or within the market as a whole, and could keep growing for years or decades.
Growth stocks have a place in most investor portfolios, although you should limit highly aggressive growth investment holdings to a smaller part of your overall portfolio. Overall, however, growth stocks typically have the potential for higher returns, especially if you always focus on investment quality first.
Here are some tips for selecting the best growth stocks as long-term investments:
Always review the balance sheets of the growth stocks you want to invest in.
While you are looking at balance sheets, look for hidden assets like real estate. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.
When investing in more-speculative growth stocks, use our “sell-half” rule. This says that if a stock you own has doubled, you should sell half so you get back your initial stake. If you are too slow to sell speculative stocks in your growth portfolio, your profits, and even your principal, can evaporate all too quickly.
Try to find growth stocks that have ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses, and will try their new products.
How to invest in long-term stocks: Dividend-paying stocks
Dividend stocks are an important contributor to your long-term gains and dividend-paying stocks typically expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers. What’s more, as you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.
We also look for dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc. to suit themselves. Minor firms cannot.
In a strategy focusing on long-term gains, avoid selling your best stocks too soon
It’s all too easy to sell a stock that looks like it’s headed for a downturn, only to buy another that is headed for a collapse. For that matter, if you make a habit of selling whenever you feel the market’s risk has gone up, you will wind up selling your best stocks way too early.
You can always find a rationale for selling. Market commentators are continually thinking up new ones, based on recent market strength or weakness, historical market patterns, political or economic predictions, changes in tax policies—the list is endless.
However, before you act on a selling rationale, take a broader look. Consider facts about the stock, and about your investment goals and temperament. If the selling rationale makes sense and you find additional good reasons to sell, then selling may be the right thing to do. But it’s always a bad idea to sell a good stock for trivial or transitory reasons.
Those following our Successful Investor approach protect themselves from impulsive sell decisions by maintaining a sense of perspective. They recognize that stock markets are volatile. More important, they understand that the value of a stock is equal to the total of all dividends and other distributions that it will ever pay out, plus the price you get when you sell it, reflected in today’s dollars.
Our three-part Successful Investor philosophy
Invest mainly in well-established, mostly dividend-paying companies; they have the experience and strength to survive and prosper despite setbacks.
Spread your money out across most if not all of the five main economic sectors; in any setback, some sectors do much better than others.
Downplay or avoid stocks in the broker/media limelight; that’s where failed predictions can do the most damage to your finances.
Some investors place more value on short-term investing than long-term investing. What has been your preference?
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The contents of this web site and our publications are based upon sources of information believed to be reliable, but no warranty or representation, expressed or implied, is given as to their accuracy or completeness. Any opinion reflects the Successful Investor’s judgment at the date of publication and neither the Successful Investor, nor any of its affiliated companies, nor any of their officers, directors or employees, accepts any responsibility in respect of the information or recommendations contained in the publications or on this web site. Moreover, the information or recommendations are subject to change without notice.
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