“Long-term stocks” might seem like an oxymoron. Public company CEOs are focused on quarterly reporting. The financial media hardly covers earnings unless there is a major scandal. And millions of new retail traders treat stocks like gambling, betting on penny stocks.

Yet long-term investing is key to successfully building a retirement portfolio. By creating your own long-term investment strategy and sticking to it, you will avoid the costly emotional mistakes that plague investors who try to maximize short-term profits. 

In this article, we’ll explain why you should hold long-term stocks, review the different types of these stocks, and outline how to select the best candidates for your portfolio.  

Why Hold Long-Term Stocks 

First, let’s get clear on what “long term” even means. 

While everybody has different time horizons, the IRS views a holding period of a full year as a long term for tax purposes. Selling a stock after holding it for a year would generally result in a lower capital gains tax rate. 

If you’re investing for retirement, a year or even several years is “medium term” at best. That’s because general market volatility might greatly influence the returns even when nothing major happened to the companies of the stocks you hold. 

If you’re building an investment portfolio that could be a source of income, your horizon should be at least a decade, preferably several decades. 

Here is why: 

• You’ll minimize costly emotional mistakes: Seeking quick profits causes people to chase the next hot investment and buy high. And fear drives them to sell low. If you are holding stocks for the long term, you don’t even need to look at prices once you’ve bought them. If your time horizon is years, not months, short-term volatility is not a concern for you. This alone will save you from making the wrong decisions based on emotions. 
• You’ll minimize fees and taxes: We’ve already noted that the IRS favors long-term stock holding, rewarding it with the lower capital gains tax rate. Brokers’ fees are another expense that you can cut by holding for the long term and avoiding frequent trading. Over the long term, these seemingly small expenses could add up.
• You’ll let compounding interest do its magic: When you hold stocks for the long term, you benefit from interest on interest: Companies reinvest profits, which in turn generate profits that are again reinvested. Trying to time the market by selling when the stock price is “too high” in order to buy back lower hardly works in the long term. It’s much easier and safer to just let compounding work. 

The greatest example of a long-term investment strategy is Warren Buffett, whose general approach is to buy great companies and hold them. From 1965 until 2020, Buffett’s Berkshire Hathaway has generated an average annual return of 20% compared to the S&P 500’s 10%. 

Yet even the Oracle of Omaha — as Buffett is nicknamed — didn’t manage to beat the stock market every year. 

You too should mentally prepare that some years the stock market as a whole (the S&P 500 index, for example) will do better than your long-term stock holdings, especially during bouts of euphoria. That’s because stock prices are influenced not only by the dynamics of the underlying business but also by currency exchange rates, interest rates, inflation, fund flows, and other macroeconomic factors. 

In the long term, however, the compounding interest can turn even a small percentage difference of your long-term stocks into impressive outperformance. 

Types of Long-Term Stocks for Your Portfolio 

Now that we’re set on holding stocks for decades, let’s dig into what exactly constitutes long-term stocks. 

Our priority should be long-term returns. Evidence shows that from 1930 to 2020 about 40% of the S&P 500’s total returns came from dividends. The rest came from capital appreciation.

So your long-term portfolio should also include both growth stocks and dividend stocks. 

Growth stocks are stocks with high growth potential. Tech stocks are great examples. 

Even though tech giants such as Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) already have market capitalizations in the trillions of dollars, they can still grow even bigger by introducing new products and services. 

For example, in 2021, Microsoft (NASDAQ:MSFT), Alphabet, and Amazon reported double-digit revenue growth in their cloud computing businesses that are already worth billions. Cloud products like AWS are as essential to Amazon’s enterprise and startup clients as Amazon Prime and Kindle to consumers. 

While tech giants still have growth opportunities, they are unlikely to pay dividends. For example, both Amazon and Alphabet have never paid dividends.

Dividend stocks are the companies that have track records of paying reliable dividends. Unlike growth stocks, these are mature businesses with positive dividend yields. Their beauty is that they likely have staying power. 

Companies like Johnson & Johnson (NYSE:JNJ) and Procter & Gamble (NYSE:PG) are more than 100 years old. They have portfolios of brands and distribution networks that are resilient to threats from tech disruption. After all, these companies have survived the Great Depression, two World Wars, and countless recessions. 

Real estate stocks are another interesting segment to consider for your long-term portfolio. Historically, real estate prices have at least met the real inflation rate. Meanwhile, rental income can provide stable cash flow. 

REITs, or real estate investment trusts, are a great way to get some exposure to real estate via stocks. REITs are legally required to pay out at least 90% of their earnings, which makes them great dividend plays. 

As we’ve seen, there are several different kinds of stocks that are worth holding long term. It’s important to note that the companies we’ve discussed in this section are just examples. It’s important to do your own research to find the right stocks for your investment portfolio.

How to Find the Best Stocks for Your Portfolio 

Long-term investors look at stocks as ownership. This is the essence of fundamental analysis: Determining the company’s value and growth potential instead of trying to predict short-term price moves.

Here is a list of things that you must consider when looking for long-term stocks from the fundamental analysis perspective: 

• Revenue growth: At what rate is revenue growth and where does this growth come from? If the company’s revenue is not growing rapidly, is the business able to maintain the current level and offer an attractive dividend yield? 
• Margins: How high are the margins? Are they sustainable at this level? What would happen if they are to come under pressure from competition or due to weaker demand?  
• Competitive advantage: How is this business able to defend its market share and margins amid competition? Warren Buffett calls this its “economic moat” — something that gives the company an ability to maintain its profits despite having a competition that provides similar products. This could be a brand, unique distribution network, unique intellectual property, or something else.  
• Competition/industry dynamics: What is happening in the industry? Are there threats from new entrants, tech disruption, or unfavorable regulation? 
• Balance sheet strength: Does the business generate enough cash flow to pay its liabilities? Is there enough left to pay the dividends? What are the capital expenditure requirements? 

Only some of these things are quantifiable, and the most important parts are hard to put into numbers. 

For example, anyone can look at the assets and liabilities and compare different ratios across companies. Yet understanding the competition and industry changes is not a trivial task. If you have experience in a specialized industry, you’re probably better positioned than most other investors to uncover great long-term stocks. 

Once you’ve reached strong convictions about a company, you should consider the stock price. Sometimes it might be too high simply because the market is overheated or because the sector became an obvious choice. 

For example, Zoom (NASDAQ:ZM) surged 600% in 2020 amid worldwide lockdowns. Even if you believe that remote work is a long-term trend and Zoom has a defendable position and great growth prospects, entering during the peak hype wouldn’t be a good idea. Despite strong fundamentals, since its October 2020 all-time high, Zoom’s share price has lost more than 40% as of May 2021. 

So to pick long-term stocks for your portfolio, it’s important to find companies that you would likely own as businesses and then watch prices to enter at sensible valuations. 

Get the Best Long-Term Stocks With Dividends

While the media and stock market pundits love growth stocks du jour, high-quality stocks with dividends are rarely discussed. They are simply less exciting than reading about Tesla or other hot tech stocks. Yet some of them pay double-digit dividends and are a great fit for long-term stock portfolios. 

To get the latest recommendations of high-quality stocks with dividends that you can buy and hold forever, subscribe to Investors Alley’s “Dividend Hunter” newsletter.