Long-term stock investing is a proven way to build wealth. But figuring out what stocks to invest in for the long term can be a challenge. Every investor has a different goal and different criteria for what makes a stock great.
In this guide, we’ll explain how to pick stocks for long-term investing that are right for you. We’ll also explore a few handy tools you can use to help you find great investments.
Determine Your Investment Goals
The first step to picking stocks is to figure out what your investing goals are. There’s no one-size-fits-all approach to investing since every investor is trying to reach their own unique financial goals.
Maybe you want to save up to buy a home in 10 years, or send your kids to college in 20. Or you could invest with an even longer horizon to save for retirement. No matter what your goals, the best stocks to pick are the ones that will help you get to where you want to be in the future.
There are a few key things to consider when thinking about your investment goals:
- Return target: What level of return do you want to generate each year? If you’re seeking a higher return, you may need to focus on growth stocks or stocks with greater risk.
- Income need: Are you planning on generating steady income from your portfolio? If so, you may want to invest primarily in dividend stocks.
- Risk tolerance: What’s the maximum amount you could lose in your portfolio and still feel okay about investing? Riskier stocks can generate greater returns, but they can also take you for a wild ride along the way.
- Interests: What do you want to invest in? Some investors prefer buying shares of companies they know and like. Others focus on specific sectors that match their expertise. It’s also worth considering whether you want to focus on individual stocks, ETFs, or a mix of both.
Define Your Criteria for a Great Stock
Once you have a broad idea of what kind of stocks you want to invest in, you can start defining more specific criteria to narrow down your choices. These criteria will define your investing strategy and play an important role in helping you build a list of potential investments.
The criteria you choose should be directly related to your investing goals. For example, if you’re interested in generating income from your portfolio, you could focus your search on stocks with a dividend yield greater than 2.5%. If you want to minimize risk, you could commit to only investing in stocks with a market cap greater than $10 billion and low debt.
Some common criteria that long-term investors consider include:
- P/E ratio: Value investors usually look for stocks with a P/E ratio below 20.
- Dividend yield: Income investors may look for stocks with a yield of at least 2.5%.
- Revenue growth: Growth investors may look for companies with annual revenue growth of 10% or more.
- Market cap: Large-cap stocks are often considered less risky than small-cap stocks.
- Market sector: If you’re bullish about specific market sector, like tech or healthcare, you can focus on stocks in those sectors.
- Low debt: Low debt is often a sign of good financial health, which is important for any long-term investment.
You can always add or modify the criteria you choose later. In fact, it’s important to do so as your investment goals evolve. Use the criteria you define as a starting point, not a restriction.
Create a List of Potential Investments
Now that you have a basis for choosing companies to invest in, it’s time to start coming up with specific ideas of stocks to look into. These are just potential investment candidates at this point – not necessarily stocks you’re dead-set on buying.
There are a couple different ways to create your list of ideas. A great place to start is to simply think about companies you know. You can also check out market news sites or write down companies that have been in the headlines lately.
Another option is to use a stock scanner. You can plug in the criteria you defined above and get a list of stocks that meet your investment requirements.
Dive Deeper into the Research
At this point, you should have a list of stocks, but you may not know a lot about them. Now it’s time to do a deep dive into each of the companies on your list.
Spend a few hours researching each stock you wrote down. Explore what the company does, who its biggest customers are, whether it’s growing, and what plans it has for the future. Cross any company that doesn’t meet your investing requirements off the list and make a note of any companies that really stand out.
The overall goal is to narrow down your list to only companies you actually want to own. You might not invest in every single one of the remaining companies right away, but you’d feel comfortable doing so.
Create Your Investment Plan
The last step is to create an investment plan. Decide which of the companies remaining on your list you want to prioritize for investment. Then decide how to allocate the cash you have available. You could buy roughly the same dollar amount of each stock or give more weight in your portfolio to a few companies you’re most excited about.
You also need to determine what price you want to buy each stock at. You might be willing to buy some stocks at current prices, but wait for other stocks to fall to your desired entry price.
Finally, determine a stop loss for each stock. This is the price at which you’ll sell off your investment. It’s always a good idea to have a stop loss – and write it down. That way, if a stock drops, you’re less likely to let emotions take over and hold onto a losing investment as it drags down your portfolio.
Tools to Help Find Long-term Investments
There are many investing tools available to help streamline the process above, particularly when it comes to creating lists of potential stocks and doing a deep research dive. Below are a few of our favorite tools for long-term investors.
Seeking Alpha – In-depth Stock Research
Seeking Alpha is a terrific platform for in-depth stock research. You can do a deep dive into a stock’s financials and see how it stacks up against peers. The range of valuation and growth metrics available is pretty impressive.
Seeking Alpha also offers opinion articles from stock analysts, financial bloggers, and other experts. These are a great way to get both the bull and bear cases for any company.
Motley Fool Stock Advisor – Great for Idea Generation & Stock Picks
The Motley Fool’s Stock Advisor is a stock picking service that offers two new stock picks each month. Recommendations focus on long-term growth stocks – past picks include companies like Amazon, Netflix, and Tesla.
This service has a more than 20-year record of beating the S&P 500, so you can’t go too wrong simply following its recommendations. However, you can also do your own research into any of Stock Advisor’s recommendations if you want to pick and choose which ones to invest in.
FinViz – Free Stock Scanner
FinViz is a powerful stock scanner with a huge selection of fundamental metrics to use as filters. If you have metric-heavy criteria for what makes a great stock, you can use FinViz to generate a list of potential stocks to research.
FinViz offers some paid features that are useful for stock trading, but long-term investors can get everything they need from the FinViz scanner completely free.
Yahoo Finance – Free Stock Research and Statistics
Yahoo Finance is another excellent free resource for investors. It offers in-depth financial data and valuation metrics, plus details about a company’s share structure and dividend history. Yahoo Finance also has a handy stock screener and lets you create watchlists so you can organize your stock ideas.
Conclusion: Picking Stocks For The Long Term
Picking stocks for long-term investing is a process. You need to determine your investing goals and define your criteria for what you want to invest in. After that, you need to create a list of potential investments, research your top picks, and create an investment plan. There are many great tools to help with this process so that you can get the long-term portfolio that’s right for you.