Picking stocks for the long term is an art. Every investor must learn this art to make profits. However, it is easier said than done. There are thousands of stocks available in the market. How do you select the best 20 for your portfolio? Long-term investors always ask the question – What stocks should I buy? The best advisor for the share market will tell you to figure out what should be avoided.
Stock markets are risky, but once you decide to invest for the long term, you relatively bring down the risk. However, staying invested for a long time will not be enough. The first step for long-term investment is to pick the right stocks for your portfolio. But as mentioned above, before you learn to pick stocks, you must know things you must avoid while investing.
Things you must not do while creating a long-term portfolio
The best stock advisory would surely not let you do the below things:
- Do not take a hot tip: When you pick stocks for the long term, never include stock in your portfolio if it comes as a hot tip. You may make a short-term gain investing based on tips, but hot-tip stocks are likely to fall at the same speed at which their price increased.
- Don’t get tempted with little profits: If your stock picks are right, you are most likely to make profits. Assume you invested in a stock for the long term. After a month, your returns are 10%. Don’t sell your investment with small gains. Recall your objective – you invested to create wealth.
- Resist investing in penny stocks: When you are new to investing, you may be tempted to invest in penny stocks since you would have heard too many stories where investors’ wealth multiplied in a few weeks or months. For long-term investing, you must avoid picking penny stocks. The potential capital loss is high, and as per risk management principles, you must not lose your capital.
Rules to pick stocks for long term
Now that you know what you must avoid, let us see how you can pick stocks for the long term. There are different strategies you can opt for to pick long-term stocks. You must select one strategy that you understand and can implement. If you try to adopt many strategies, you may get confused – it may lower your return capability. Below are the top three tips that best advisors for the share market tell their clients when they decide to pick stocks on their own:
Read the stock fundamentals: To select stocks for the long term, you must learn to read their key business ratio and financial statements. For example, you must look at the PE ratio. It tells how many times the company’s earnings are investors ready to pay for one share. If the stock has a lower PE (compared to industry and peers), it is considered undervalued. Similarly, you can look for the Debt to Equity ratio, current ratio, and Return on Equity before picking stocks.
Understand risk and diversify: The market has two kinds of risks – Systematic and Unsystematic risk. The former is an external risk to the market, while the latter is related to the risk associated with the company. You must understand the risk and try to lower the risk by diversifying. You must have stocks across sectors and a market cap in your long-term portfolio.
Use technology, if required: You need to master many things to get decent returns from the stock market. Stock selection, managing risk, portfolio rebalancing, asset allocation, etc. For long-term investment, you need to do these things quarter on quarter and every year. For most investors, doing all this is impossible – a lack of time or knowledge. If you fall in this category, you must opt for technology-driven best stock advisory. Such platforms can take care of your equity portfolio and help you create wealth over time.
When it comes to long-term investment, safe investing should be your mantra. You should create strategies to help you avoid losses and prove to be a good return generator. We have created Jarvis Invest to help investors invest in the stock market and make the most of it.
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