Investing > Long-Term Stock Investments Explained

Long-Term Stock Investments Explained

 Want to invest in stocks without the daily pressure? Try investing for the long haul. 

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Updated April 08, 2022

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Do you want to get involved in the stock market without being chained to your computer?

If you answered ‘yes’, then long-term investing could be just what you’re looking for.

Not only can these investments feature lower risk when compared to other types of stock, but they also don’t require you to check in on them on a daily basis as they would if you were trying to make money via day trading.

But before you put all of your hard-earned cash into the first fund you come across, it’s important to note that long-term investing must be done properly, otherwise your obliviousness can be your oblivion (we’re saying it can be risky). ⚠️

Just look at JCPenney. If you had invested in the company in the late ’80s, you probably patted yourself on the back as the company continued to return impressive returns for the next decade. You may have even forgotten you owned JCPenney stock to begin with. But then, as the 2000s rolled around, JCPenney entered a steep decline—and never recovered.

If you left your long-term JCPenney investment unattended, you could log in one day to find you have nothing left. But to take things further, which stocks feature a reliable, trustworthy foundation, but still have room for growth in the long haul? This isn’t easy to figure out—which is why it’s absolutely critical to know how to invest long-term before you begin. 

Ready to learn about long-term investing? Let’s get to it! 🚀 

What you’ll learn
  • What is Long-Term Stock Investing?
  • Good Stocks for Long-Term Investments
  • Risky Stocks for Long-Term Investments
  • Benefits of Investing in Stock Long-Term
  • Limitations of Investing in Stock Long-Term
  • Improve Your Long-Term Stock Investing
  • Conclusion
  • Get Started with a Stock Broker

What is Long-Term Stock Investing, Exactly?

Long-term investing is putting money in a stock that you plan to hold for a long period of time. In general, this time period expands multiple years—sometimes even decades.

These long-term holdings, if selected properly, can return gains to their holder without the stress of having to make frequent changes to their portfolio.

This method of investing is beneficial because it has historically proven to be one of the few ways to create wealth while also beating inflation. Instead of worrying about the small dips and spikes that stocks experience every day, the goal of long-term investors is to take the time to find quality companies and leave their money in said company for the long run. 

What Stocks Make for Good Long-Term Investments? 🗃

As mentioned above, the key to long-term investing is to select stocks very carefully. This is because there are very specific assets that perform well in the long run. If you choose the wrong company, you could end up investing for years with nothing to show for it. 

Below are some examples of stocks you should consider investing in when you plan to hold on to them for the long term. Though, it’s important to note that even long-term investments are risky; there’s always the possibility that you could lose all of your capital when it comes to stocks. However, when it comes to playing it safer in the long run, there are some decent choices.

Value Stocks ✅

One trick which many long-term investors use is to look for undervalued stocks, which are also known as value stocks. These types of stocks are investments that are currently trading for less than their fair market value.

Besides just getting a good deal when you purchase these stocks, many of them typically offer dividends. This allows you to gain returns off your investment while you hold it. 

Value stocks are usually undervalued as a result of negative publicity, or a temporary issue in the market. One way of finding a potential candidate is by looking at the P/E ratio. The lower the P/E ratio, the more undervalued the stock is, more or less. 

An example of a potential value stock is Meritage Homes (MTH). In early 2022, it had a P/E ratio of around 6, meaning it was much lower than the national average of 30, making it a value stock. If you look even further into the company, you will also see that they are home builders, specializing in building homes for those who are above 55 years of age. 

The population of the U.S. is quickly aging, and more and more people will be in the market for this type of home. Thus many long-term investors would take this information into account when considering adding a value stock like Meritage Homes to their portfolio. 

Growth Stocks 📈

Growth stocks are a much different long-term investment strategy than value stocks. Rather than searching for a company that is undervalued, you will be looking for one that has potential for massive growth.

Of course, this is often easier said than done, as it is difficult to predict the future of a company. This makes growth investing a much more risky form of long-term investing, but it can pay off in the future. 

Growth investing is typically based on innovation, as you are investing in something you believe will be innovative for the future. Oftentimes, these stocks will not yet have proof of sales, rather they are just starting out and quite early in their phases of development.

This is why you want to be sure to balance any growth stocks you invest in with some lower-risk investments to help manage your risk exposure. 

Netflix (NFLX) is a growth stock that has rewarded long-term investors handsomely. When the company first started out in 2002, it may have been difficult to see the future of the home DVD rental service when the investors bought in for pennies. Twenty years later, in 2022, one share of Netflix costs over $500

Netflix was and still might be a risky growth investment stock. This is because investors are trusting that the company will continue to innovate to keep up with the times. Netflix has a pretty good track record, switching from DVD delivery to home streaming, but it’s difficult to predict whether or not they will continue to be a step ahead of their competition—which is growing. 

ESG Stocks ♻

It seems like not a day goes by without the news reporting another company that is engaging in immoral practices like child labor or dumping radioactive waste in rivers. 

ESG companies, well, they’re the opposite of this as they focus on trying to create a business the sustainable and environmentally friendly way. And incidentally, some ESG stocks have shown to be a much better strategy for long-term investing than other types of stocks. 

Why you ask? While child labor and destroying the environment might help a company save money in the short term, it actually tells an investor that there are many underlying problems that will surface in the long run. 

If a company needs to widen its margins by doing things that are immoral or illegal (which is cheaper) this means their margins were likely unsustainable to begin with. Not only that, but now they are restricted by the import/export laws of the nation where they are seeking the child labor, and subject to any political unrest which may occur there in the future (and where there’s such immoral behavior, there’s bound to be political unrest).

A well-known but often overlooked ESG stock is Microsoft. Unlike its competitors, Microsoft employs Americans and pays all of its employees a living wage. It also sources all of its materials in a sustainable way. It has shown tremendous growth over the years, likely in part thanks to its fair treatment of employees and the environment. 

Stock Indices 🧮

Stock indices are a great way to manage your risk with long-term investing. Rather than putting all your money in a single company, and hoping for it to grow, you will be placing your money into several different companies typically in the same sector. 

This is sometimes done through a security called an Exchange Trading Fund (ETF), which is a bundle of similar stocks that you invest in all at once. For example, a technology-focused ETF may contain stocks like Microsoft, Google, Apple, and Tesla all in one. 

When you invest in a stock index, you are minimizing your risk by diversifying. This way, if one company, say Apple, goes under, you won’t lose all your money. Apple going under will have a small effect on the price of your ETF, but not a major one because ETFs are typically made up of over 100 companies.

Say you are interested in investing in the Metaverse, as you know this technology is truly the future. But how do you know which companies will make it, and which will fail along the way? Easy, you don’t. This is why you would want to consider putting your money in a Metaverse ETF in order to invest in what you think will succeed without putting all your eggs into one basket. 

What to Look for in Long-Term Stocks 🔍

Still looking for other long-term investing opportunities? Well—good news. You can look at a number of a security’s fundamentals to determine an opportunity for potential growth.

When trying to identify assets you can keep in your portfolio for a long time, there are several characteristics you will want to look for. If a stock or other investment asset has all of these characteristics, it’s probably a good idea to consider it for your portfolio. 

Here are the characteristics of potential long-term stocks:

  • ☑ You know how a company generates profits, and this method seems sustainable for years to come.
  • ☑ A good P/E ratio.
  • ☑ The company has shown an ability to innovate and adapt as the world changes.
  • ☑ The stock is resilient to both recessions and bear markets.
  • ☑ The stock is not just a fad.

If your potential investment has all of these things, it’s possible it could be a good addition to your long-term investment portfolio. 

Which Stocks Are Risky Long-Term Investments? 🤔

Just as there are stocks which are good for a long-term investment portfolio, there are some which come with an increased risk that you might want to rethink as you build a long-term portfolio. 

These investments that should be avoided are typically those that offer little reward for their high level of risk. That, or it’s just too difficult to judge their long-term performance. 

Penny Stocks 🪙

A penny stock is a stock that belongs to a small company and costs less than $5 a share. While this may seem attractive, especially when you are looking for those value stocks, penny shares are not the best for a long-term investment plan. 

This is because a company offering penny shares typically doesn’t have the track record to show their company can weather through difficult market conditions, or perform as predicted. Thus, these investments carry too much risk for too small a chance of a reward.  🚧

If you are very interested in a particular penny stock, you can include it in your portfolio (after all, even big companies like Apple start small) but ensure this is a very small portion of your portfolio. The rest of your portfolio should be made up of less risky long-term investments. 

Penny stocks have become increasingly accessible through most popular stock brokerages. Popular stock apps like Robinhood allow you to filter for and find penny stocks seamlessly.

IPOs 🌱

IPOs, an abbreviation for the initial product offering of a company, are not advised for a long-term investment portfolio for the same reason as penny stocks, they are simply too unpredictable.

Every day there are people coming up with new business ideas, many of which offer stock, and most of which don’t make it. Investing in a company that hasn’t produced the promised product yet, and are seeking an investment to produce said product, is a huge risk. 

Similar to penny stocks, you can include an IPO in your long-term portfolio if you really feel strongly about the company. But remember, investing in an IPO is speculative, and it probably shouldn’t make up a huge portion of a long-term investment plan. 

Stocks That Are Becoming Outdated 📆

It’s time to face it, things change, and sometimes a product that was all the rage is no longer applicable. 

When this happens, the stock may drop in price as investors exit their investment in the product. Although the company may have a good track record of profits, it’s important to recognize these stocks for what they are, outdated investments. 

The problem with outdated investments is that they will never recover. They will continue on their downward trend until they eventually reach zero. Just look at Radio Shack. The company has long failed to innovate, and despite efforts to bring itself to the current decade, it continues to fall behind.

An investment in Radio Shack may be tempting because it’s cheap, and the company says they have plans to recover. The reality is, however, that Radio Shack is an outdated stock and it will likely become obsolete as JCPenny has. 

Stocks Sensitive to External Factors 📊

There are some stocks available on the market that are bad choices for long-term investing because they are too sensitive to outside factors. 

An example of this would be airline stock. Although people typically need to fly year-round, the vacation industry only performs well during a booming economy. This means any sort of recession may bring it to its knees. 

Not only that, but look at how the COVID19 Pandemic and 9/11 have affected the airline industries. Both times the stock prices took a nosedive that took years to recover from. 

For this reason, airline stocks are stocks that many would consider simply too volatile to include in a long-term investment portfolio, as you never know when they will be doing well, or when people will decide they can’t afford to fly to the Bahamas after all. 

Benefits of Investing in Stocks Long-Term 🌟

Despite the amount of research it takes to pick stocks that you will hold long-term, there are several benefits you will reap by doing so. 

Less Stress 💆‍♂️

First of all, investing long-term, and knowing you will be doing so in advance, allows you to ride out the highs and lows of the market with little to no stress. Rather than checking your portfolio daily and wondering if you should sell as the result of a news event, you know that you will ride out the low and the stock is likely to bounce back in the future. 

The reality is, the average investor is a poor market timer and trying to time the market will likely never work. With long-term investing you skip this now or never mentality and take a much more peaceful approach to investing. 

Fewer Taxes 💸

Investing long-term also helps you avoid costly capital gains taxes. This is because the capital gains tax rate changes depending on if you sell stock in the same year you purchase it. Selling in the same year is known as short-term capital gains and these can be subject to very high tax rates. 

Rather, you will pay the long-term capital gains taxes, which depending on your tax bracket, may be next to nothing. It’s crucial to keep this in mind—otherwise you could get a surprise envelope from the IRS in the mail. 📬

Less Money Goes to Fees 💵

Each time you buy or sell a stock, there is typically a fee involved. When you are trading on a daily basis, these fees can really add up fast. With long-term investing, you only pay a single fee to buy in, and one other when you decide to cash out–years down the road. 

Limitations of Investing in Stock Long-Term ⚠️

Just as there are benefits to making long-term stock plays, there’s a dark side as well. There are three major potential downsides, depending on your particular situation, that you need to be aware of.

Less Returns 💰

The obvious downside to investing long-term is that, if you are even a halfway decent swing trader, you can make much more money doing so than what you will make investing long-term. 

Long-term investing typically only works with low-risk investments, and these investments are typically low-risk because they won’t earn you a large return, it’s as simple as that. The average return for long-term investing is typically the same as the market, somewhere around 10%. 

Meanwhile, many swing traders can make upwards of 25% if they do their research properly. Swing trading is purchasing a stock for the purpose of only holding it for a few weeks or months—until there is a spike in price, then the investor will sell for a small profit. 

Your Capital is Tied Up ⛓

And while your money is in these long-term investments, you can’t use this capital for anything else. This means you could miss out on a different investment opportunity that could make you a lot of money. 

Take a look at this example, if you had purchased Apple stock for $188 in August 2021, then sold for $216 in October, you could’ve made $26 for each share of Apple you owned. This is a 12% return in just two months, then your capital would have been free to use for other trades the rest of the year. 

high volatility
In swing trading, high volatility is used to generate profit whereas long-term investing only relies on the overall growth of a stock. Image by TradingView.

You Have to Remind Yourself You’re in it For the Long Run 🏃‍♀️

Long-term investing means you will ride out the ups and downs of the market, but it doesn’t mean you won’t do so without some nerve-wracking moments.

There may come a bear market or recession that seems to destroy your long-term portfolio. You may even be tempted to cash out to cut your losses. If you don’t want to panic sell your entire portfolio, you will need to continually remind yourself that this is part of long-term investing.

It can be difficult however, to sleep at night knowing your portfolio is decreasing in value and it’s best for you not to do anything about it. Other types of trading typically avoid this stress by placing stop-loss orders. 

Tips to Improve Your Long-Term Stock Investing 👨‍🏫

Ready to dive into long-term investing? Before your feet leave the diving board, take a look at a few tips to help you be successful with this investing strategy.

Employ Dollar-Cost Averaging 📝

Dollar-cost averaging is the practice of putting the same amount of money into the stock market each month. This way the investor can manage investment risk while also not needing to worry about timing the market.

Dollar Cost Averaging
By dollar-cost averaging, investors make sure they’ve bought a stock for its average price, rather than a low or a high price.

This works well for long-term investors because you may not be able to buy all the stocks you want in your long-term portfolio right away. For some investors, dollar cost averaging offers serious benefits—you are able to purchase some stocks each month, building your portfolio while what you have already invested, earns returns.

Invest Money You Don’t Need ⚖

While it may seem easy to move your emergency fund into long-term investments, this isn’t a great way to get capital to invest. Removing money from long-term investments can be quite costly. This is why it is best to only invest money long-term that you can afford to be without, even in an emergency.

Watch the Fees 🕵️‍♂️

Speaking of cost, before you open a long-term portfolio you will want to find the trading platform that is right for you. With long-term investments, you are likely planning to have your account for years, maybe even decades, and moving these funds to another platform after buying them is fairly complicated and will incur a bunch of fees.

Take the time to research various brokers and find one which has reasonable fees, an interface you enjoy, and a company you want to use for the long run.

Diversify 📜

With long-term investments it is more important than ever to diversify—unless you have a crystal ball of course.

The point is, you can’t see the future, and even if you do all the research in the world, your money could still end up in a stock that goes under in two years. Just think of the COVID19 pandemic and its effect on the stock market, no one could have seen it coming or predicted that the world would shut down for a few weeks.

So no matter what amazing growth or value stock you find, it is generally ideal to put your money in a variety of stocks. You might also want to consider putting an ETF or two in your portfolio. These ETFs can sometimes help your portfolio to survive even the most unpredictable circumstances.

💡 Seriously considering long-term investing? Learn how mean reversion works.

Conclusion 🏁

Day trading or swing trading stocks can be stressful, so if you are looking for a more laid-back approach to investing, long-term investing is the strategy for you. You’ll spend your time researching stocks upfront, but then you’ll buy your shares and leave them for at least a year, but probably longer.

Even though there are a few downsides to long-term investing, it really is a good, typically low-risk way to invest your money. Just be sure to pick the right platform, diversify your funds, and only invest money you don’t need, and you’ll be good to go! Before you know it, you’ll have a nice long-term investment portfolio that is earning returns without needing daily attention.

Long Term Stock Investments: FAQs

  • How Long Do You Have to Hold a Stock for it to be Considered a Long-Term Investment for Tax Purposes?

    For tax purposes, a stock needs to be held for at least 1 year to be considered a long-term investment. This means you cannot buy the stock then sell it in the same year if you want to pay lower capital gains tax.

  • What Assets Other than Stocks are Considered Long-Term Investments?

    Other long-term investments besides stocks include bonds, precious metals, and real estate.

  • Is Long-Term Investing More Profitable than Short-Term Investing?

    Long-term investing isn’t always more profitable than short-term investing, as a good short-term investor can bring in high returns if they trade skillfully. Becoming a short-term investor takes practice, however, and can be risky, so long-term investing is generally seen as a safer profitable way of investing.

  • How Do Long-Term Stock Investors Protect Themselves from Market Crashes?

    Long-term investors protect themselves from market crashes by diversifying their portfolios and investing in products that are recession-proof like gold, bonds, and very safe stocks.

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