How to choose long-term share investments

06 October 2017

Stocks which might build wealth or provide income over a lifetime are the holy grail for many investors. We explain how to identify long-term share investments for your portfolio.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • How to choose long-term share investments.
  • Why investing in individual shares is generally risky.
  • Why it’s important to do plenty of research before investing.

Finding stocks that you can buy and hold onto over a lifetime with the potential to produce good returns is difficult. Warren Buffett may have famously said that his favourite holding period was “forever”, but few investors are as confident and skilled as Buffett, particularly when the market is suffering significant periods of economic uncertainty.1

Remember too that buying individual shares is a risky approach to investment, as their performance relies solely on the particular company concerned.

Wherever you choose to invest, it’s important to do your homework. Searching for long-term stocks to invest in means focusing on those that have the potential to endure market volatility, while continuing to grow and reward shareholders. Of course, no company is immune from running into trouble, but some may be better equipped to endure difficult times than others.

Here are some strategies that investors can make use of to help them find stocks that will hopefully build wealth, or provide an income over a lifetime. However, no matter how long you hold an investment, its value can still fall as well as rise as can any income that it generates and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

Are you looking for growth or income?

Before choosing any investment but particularly long-term share investments, you’ll need to consider your investment aims, which includes whether you are investing for growth or income.

When you invest for income, any interest or dividend income from your investment will be distributed directly to you. The hope is that you will receive an income at regular intervals, and that this income may increase over time but of course there will likely be times when that doesn’t happen.

If you’re investing for income, you’ll need to search for companies that have paid consistent dividends, which ideally offer the potential to grow these over time. The dividend yield is the simple rate of return paid to shareholders. For example, GlaxoSmithKline, the British pharmaceutical giant, is a popular choice for long-term income-seeking shareholders, with a current dividend yield of 5.2%.

However, like the value of the shares that produce them, bear in mind that dividends can fall as well as rise. The current dividend on offer is not a reliable guide to what payouts may be in the future.

By contrast, when you invest for growth, you’re usually hoping from long-term gains from a particular stock, rather than a regular income. Any income generated will typically be reinvested, with the aim of raising the value of your investment over time.

Do your research by searching for companies with solid track records of delivering revenue growth, and increasing cash returns over time, although remember that past performance cannot be relied on as a guide to what will happen in future. Check that there is cash on their balance sheets too. A healthy profit margin can be an indicator that a company is better able to invest in its business and expand going forward. If the profit margin is falling, this could be a sign that cost-cutting may be on the cards, or that a business may need to downsize in future.

Look to the long-term

Consider how long any company you are considering investing in has been around, and whether the products or services it offers have staying power. Look for rock solid businesses which have been around for decades, and which have demonstrated long-term success but remember the shortcomings of relying on the past to indicate the future.

Does the company offer a consumer staple which is likely to always be in demand, for example, such as a food or popular drink? Alternatively, perhaps the company offers a service which people and businesses are always going to need, such as waste management or raw materials, and is well-known within its particular sector?

Typically, the longer you are prepared to stay invested in a particular stock, the greater the potential for positive returns. There may be some short-term setbacks while invested in the stock market, but provided you remain focused on your long-term investment objectives, you can avoid being distracted by any temporary blips. For example, Unilever, the consumer goods company which is behind home and personal care products such as Dove and Domestos, as well as food and refreshment brands such as PG Tips, Marmite and Magnum, has remained resilient throughout periods of economic uncertainty, and is often rated by analysts as a long-term ‘buy and hold’ stock.2

Similarly, another long-standing company which has proved it has long-term staying power is pest control business Rentokil. It has tended to perform well regardless of cyclical factors due to its dominance in its sector, and pest control services will always be required.3

Please bear in mind that our reference to these particular companies does not constitute advice or a personal recommendation to invest in this or any other investment. If you’re unsure where to invest, seek professional financial advice.

Of course, there are plenty of companies which have failed to match Rentokil or Unilever’s success. Electrical retailer Comet Group, for example, which began life in 1933, ended up being one of the biggest high street casualties of this decade. The chain went into administration in 2012 having been hit by its failure to keep up with online competitors such as Amazon, and falling consumer spending due to the global financial crisis.4

Think carefully before investing in the “next big thing”

Taking a punt on a new company which is tipped to be a top performer might seem appealing, but it’s highly risky investing in any business without a long-term track record of success.

Similarly, be wary of any business which you don’t fully understand. It’s vital you’re clear on exactly what they do and what their prospects are. Always understand what you are investing in, because, again, as Buffet said: “Risk comes from not knowing what you’re doing.”5

There are plenty of examples of fashionable stocks that turned out to be risky investments during the dotcom boom and bust of the late 1990/early 2000s. During this period, many investors bought into technology stocks, dazzled by the potential of the internet, only to find many companies shut down a few months later.6

Among the highest profile casualty was internet sportswear retailer Boo.com, which was founded in 1998, but closed just two years later in 2000, after it couldn’t turn a profit fast enough to remain solvent. With it went around £80m of cash from investors, who believed in its story as a pioneer in the ecommerce space.7 Online health and beauty retailer Clickmango.com similarly shut down just three months after launch, despite significant hype and success with investors, with claims directors raised £3m within eight days of starting to approach backers.8

These examples underline the importance of avoiding the latest fad, particularly when searching for long-term share investments, and instead focusing on businesses supported by particularly strong underlying business fundamentals with a long-term track record.

Don’t rely on only a few stocks

Remember that owning shares in only a few companies is a very risky approach, as you’re relying solely on the performance of these businesses. It’s therefore a good idea to spread your risk by investing in a wide range of different companies across several different sectors.

If you’d rather have access to a much wider range of stocks, pooled investments such as unit trusts or Open-Ended Investment Companies (OEICs), or closed ended investment trusts enable you to invested in hundreds of different shares, helping to reduce risk. These pool your money with that of other investors, with a professional fund manager choosing and managing a wide range of investments on your behalf. If you’re unsure where to invest, seek professional financial advice.

Bear in mind too, that although your plan may be to invest in stocks or funds for life, this doesn’t mean you should never review your portfolio. Hanging onto poor performers year after year in the hope that they might one day recover could end up costing you dear, so try not to become too emotionally attached to your investments.

Find out more about the impact of your emotions on your investments

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