All investors want to know which investment gives the highest returns.
You may wonder if it is better to hold stock long-term. Is it more profitable to buy and sell stocks or hold on to them for several years?
Successful investors understand that long-term investments generally provide better returns. They learn which investment gives the highest return over a long period and know where to invest money to get good returns.
You probably want to know where is the best place to invest money right now.
But, as a new investor, you know none of these things. How do you know which stock is good for the long term and where to invest money to get good returns?
Well, you don't. Not yet, anyway.
But, you will very soon.
In this article, we will look at the advantages of long term investing. You will discover where to look for long term stocks to buy and hold. You will find the top-secret tips for learning how to research companies for investment. With the checks done, you will know if it is good to hold these stocks long-term?
By the conclusion of this guide, you will know precisely how to identify potential for investment in company stocks, giving you an edge for selecting profitable stocks.
The guide may help you to find the best long-term stocks for 2021.
The benefits of a long-term investing outlook are numerous. Investing long-term is likely to provide the greatest gains, as long as you invest in the right stocks, and we are here to help you with that.
- What is a Long-term Investing Outlook?
- What are the Benefits of Long-term Investing?
- How to Prepare for Investing
- How do I Diversify My Portfolio?
- What To Look for When Investing in a Company
- Compounding Investment Returns
- The Key Takeaways for the Benefits of a Long-term Investing Portfolio
What is a Long-term Investing Outlook?
All investors have subjective opinions on what is a long-term investment. For some, it may be a few days. For others, it may be five or more years ahead. Realistically, to benefit from investing, a long-term approach would be five to ten years.
There are no quick ways to get rich in investing. A long-term investment outlook may, however, reap significant rewards.
If you are new to investing, the thought of tying up your money for ten years may sound crazy. But, realistically, the decades roll around so fast. Investing is all about the long-term gains. If you want short-term profits, reconsider directing your energies into day trading stocks or Forex.
What are the Benefits of Long-term Investing?
When you invest in stocks and shares, you are investing in the company. You'll experience the highs and lows of the business, witnessing periods of growth and times when the market downturns. If you only stick around for a year, it doesn't give you enough time for prices to balance out.
Most new investors find it stressful to see unfavourable price fluctuations. They worry about losing their money and, in a panic, end up dumping their investment. Then, further down the line, they realise their mistake when they see how the price came back and may have exceeded expectations.
New investors typically ask which investment gives the highest return over a long period. But it's the wrong question. Investments with the greatest return may well be the highest risk investment. Alternatively, you look for low-risk, high return investments. But, you may well be searching for gold dust.
Having the mental fortitude to weather the highs and the lows will determine how successful you are as an investor.
Read Also: Best Long-Term Investments
How to Prepare for Investing
If you want to start investing and are determined to go it alone, there are several factors to consider
- Start small – it's exciting to envisage making yearly profits from investing. But, it's essential to assess your investment style and abilities. Once you have figured out the best ways for you to invest, you can start adding to your portfolio
- Your risk tolerance – are you prepared to sit it out when your investments aren't doing so well? What happens if your shares drop 10% overnight because of adverse economic news? Do you hold or sell? Successful investing is a long game.
- Risk to reward – figure out how much you can lose compared to how much you can gain. If the potential losses are greater than the gains, walk away from that investment and choose another
- Investment Capital – you may be limited by how much capital you have to invest. Whatever level of investment you decide on, it needs to be money you can comfortably afford to lose, and that won't keep you awake at night. The less stressed you are about your investment, the easier it is to focus on long-term gains
- The anticipated timespan – how far are you looking ahead? Are you happy to invest for five to ten years? For certain investments, such as fixed-income assets, there is a risk of loss for early closeouts. The longer you have to invest, the more chance there is of coming out with a profit
- What are your financial goals – do you want your investments to provide a retirement income? Calculate how much you need to retire and what age you plan to retire. Work out the levels of investment and returns you need to generate for the retirement sum. It's a great reality check to ascertain if your financial goals are realistic and achievable
- Observe your emotions – it's surprising how emotions get triggered by money. When your stock prices drop, do you go into a tailspin? Or do you remain calm, trusting that prices always level out over time? Keep track of your emotions and avoid knee-jerk reactions to the behaviour of your investments
One of the most critical aspects of investing success is diversifying your portfolio, but what does that mean?
How do I Diversify My Portfolio?
You've no doubt heard the expression, don't put all your eggs in one basket.
The theory behind that expression is that if you drop the basket of eggs, they will all break, and you would lose the lot. The idea is that you spread your investment risks by having a diverse portfolio.
When you first start investing, it's natural to seek out a bargain. You want to find low-risk and high return investments. But the tendency to heavily invest in one opportunity is risky. The safest bet is to limit any asset to no more than 5% of your portfolio.
Always research for correlation of investments. If all your assets move in the same direction simultaneously, that's high risk and is unlikely to bring the rewards you seek from your investments.
You can invest in asset classes, such as equities, fixed income (bonds) and cash, which you can invest via individual securities like bonds and stocks. Or you can invest via funds like ETFs or mutual funds.
It can be tempting to check out the bargain basement of stocks, but it's sensible to include potential growth stocks and a few blue-chip companies. Add in index funds and bank accounts for cash.
If you have the stomach for it, you can look at long-term investment in one or two cryptocurrencies. Limit your holdings to 5% of your investment and add crypto to a five to ten-year plan. Research the cryptocurrency as with any other investment. Do the background checks for innovation and growth in a similar way to company searches when buying stocks.
What To Look for When Investing in a Company
If you are serious about investing, there's some work to be done.
Never pick a stock based on something you heard about on social media. It's a sure way to lose your investment.
Researching a company before investing in stock is the crucial step to avoid bad investment decisions. Learn about the leaders with the company, the culture, the business model and the financials.
Find out about their plans for the future of the company. You will gain insights into how your stocks may perform over time.
Below are 8 key areas to check before investing in a company.
- Check out the Chief Executive Officer (CEO) – do you feel confident in the CEO's ability to manage and grow the company? A good CEO can take a company to new heights of success. But an inefficient CEO can bring a company to its knees.
Does the CEO have a good track record? Have they helped other companies to expand? Do they have experience in the industry they are in now? What would happen if they left the company? Would it negatively impact growth?
You can find out details of the CEO from their LinkedIn profile or about us page on the website
- What is the company business model – all companies have a defined model for growing and managing a business. How is the company intending to increase profitability? Are they clear about their target audience, products, and services and where they fit within their industry? Finally, do you agree with their business model?
- What is the company USP – what is the unique selling proposition (USP)? How do they stand out among the competition? Do they have an edge? For instance, look at Amazon and how they have cornered the market with their exceptional service and innovative customer experience
- Study revenue trends and price history – look at quarterly figures for total product sales or services. Do the statistics show growth or a decline? Look for a year-on-year increase as it demonstrates that the company is on the ball with strategies and sales. If you see a decrease over multiple consecutive quarters, this could be a warning bell for investors. You can also check the stock price history. If prices correlate with increasing revenue, that's a positive sign of future growth
- What is the year-to-year net income growth – what was the income after expenditure? It's all very well showing gross income, but it's the bottom line that counts. If the net income is decreasing, it could indicate increased expenses and inefficient business operations.
Profits do impact the price of a company's stock
- Study the profit margin – how much revenue does the company take as profit after paying tax, interest, and expenses? For example, if a company has a turnover of $15,000,000 with a net income of $1,500,000, the profit margin is 10%. Look for a company with steady profit margins as it's an indicator of efficient operations
- What is the debt to equity ratio (D/E ratio) – how much debt does the company have, and how do they manage it? Compare the total equity shareholders have with the total debt. If a company is over-weighted by debt, it can limit business decisions.
The lower the debt ratio, the more risks a company can afford to take without worrying about defaulting on the debt. D/E ratios vary by industry, so research industry levels of acceptable debt
- What is the price to earnings ratio (P/E ratio) – this is an indicator of whether a company's stock is overpriced. Compare the current stock price with the EPS (annual earnings per share). Take the net profit and divide it by the total outstanding shares.
For example – a company with a net profit of $5 million and 10 million outstanding shares of stock has an EPS of $0.50 per share. Then take the stock's current price, say $10 and divide it by $0.50, which gives you a P/E ratio of 20. Then compare this to the industry average P/E ratio.
A higher P/E Ratio could indicate that the company is undervalued, something that savvy investors look for before investing in a company.
It may seem like a lot of work to do these company checks, but it will pay dividends.
Think of it as laying down the foundations for a house. If those foundations are weak, the house will collapse. Time spent learning and researching will build a solid, diverse portfolio that will grow over time.
Read Also: 5 of the Best UK Dividend Stocks to Buy
Compounding Investment Returns
Compounding is the magical ingredient for investing. Compound Annual Growth Rate (CAGR) is the rate of annual return, typically expressed as a percentage, and it represents the cumulative effect of losses or gains on your capital – how much you have invested.
In simple terms, if you invested $10,000 and returned 25% profit from dividends and other gains, you have generated a $2,500 annual increase.
But, if you have been compounding your monthly profits, your $10,000 is growing every month. Add your profits to your capital.
So, let's imagine you make a 5% gain a month, and every month, you add your gains to your investments.
Month 1 - $10,500 (gain $500)
Month 2 - $11,025 (gain $525)
Month 3 - $11,576.25 (gain $551.25)
Month 4 - $12,127.50 (gain $578.81)
Month 5 - $12,733.87 (gain $606.37)
In five months, you have gained $2733.87 by compounding your monthly returns. Year on year, compounding maximises your returns.
The above is an ideal scenario and adds to the benefits of a long-term investing outlook.
Some months your investments may not generate 5%. At times, you may see no gains. But, stick to the basic premise of compounding all of your gains, and your investments will grow.
You may ask, is it better to hold stock long term for compounding? Yes, probably. Over a period, the price of your investments may adjust favourably, so you make the most gains.
Starting with new stock, you're not familiar with the price behaviour. Find out which stock is good for the long term by doing the company checks. A little work beforehand can help you find the highest return investments.
The Key Takeaways for the Benefits of a Long-term Investing Portfolio
Investing can be challenging, but only if you don't know what you are doing.
You now know how important it is to spread your risk by diversifying your investment portfolio to maximise the benefits of a long-term investing portfolio.
Doing the 8-point company check may seem time-consuming but is well worth the effort. New investors buy stocks from a social media tip. But, you know better than that. These checks will make you a more profitable investor.
The power of compounding your investment growth will increase the size of your portfolio. By committing to a long-term outlook for investment, you can add to your portfolio each year.
Growing your portfolio increases annual gains and, by the time you are ready to think about selling some stocks, you'll be in a great position to make a nice profit.
Add a few blue-chip companies to your portfolio. Maybe add an emerging company that shows innovation, outstanding leadership and growth potential.
If you have an interest in cryptocurrencies, filter in 5% to your portfolio. Check out the top ten cryptocurrencies on CoinMarket and do your research.
Commit to a ten-year investment plan. Set your financial goals and sit back and enjoy the ride.
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What are the top 10 best stocks to buy now?
Plenty of investment experts and exchanges will tell you the top 10 best stocks to buy now. But beware. Never buy stocks blindly on the faith of a supposed expert opinion. Do the company checks as we outlined in the article.
How do I find long term stock picks?
When you sign up for a stock exchange, you can download a stock screener. Set the parameters for stocks with liquidity, volume and some volatility. Once you have identified a few long-term stocks to buy and hold, you can then do your company checks before committing to buy.
How long do you have to hold a share before you can sell it?
You can hold a share as long as you want, but to maximise earning potential, hold for at least a year if you can.
Can you hold a stock forever?
What's the definition of forever? We aren't infinite beings, you know.
If you have a diverse portfolio paying dividends and making annual gains, hold on to it. If you are worried about your life departure date, you can transfer your portfolio to someone you choose.
How long should you hold a losing stock?
It's a tricky question because, regarding a stock, how do you measure the loss?
The price of the stock will rise and fall. Before panic selling, do some checks on the company. Are they in trouble? Has the CEO left the company, or some epic company mistake caused the stock price to drop? If the company looks in difficulty, that may be a good time to offload the stock.
What are the best cheap long-term stocks?
Cheap isn't always best.
Investment experts tell us to avoid penny stocks. It rarely ends well for new investors. Sometimes you may get an opportunity for an IPO (initial public offering), but prices may be over-valued, and you get a better deal once the excitement of the IPO settles down.
How long should you hold your stocks?
Ideally, plan to hold your stocks for around ten years.
Are low-risk, high return investments better than high-risk, high return investments?
It depends on your attitude to risk and how comfortable you are with allocating money you could lose. It's not easy to assess risk with stocks. Are blue-chip stocks safer than emerging companies? Possibly, but sometimes new companies leave the starting gate with massive innovation and growth.
Assess your appetite for risk and don't risk money you cannot afford to lose.
Which investment gives the highest returns?
There's no direct answer to this question.
The main criteria for the highest return on your investments is to spread the risk by diversifying your portfolio. Choose your assets carefully and limit each investment to 5% of your portfolio.
Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.
Trading or investing in ETFs, Bonds, and other financial instruments may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.